S&P 500 New Highs And The Carl Icahn Reversal

by: Danny Riley

The S&P 500 futures were just one handle off their all-time high when Carl Icahn's statements hit the tape. Icahn said that he was being "very cautious" and that the stock market could see a "big drop" because many of the companies are fueled by low borrowing costs rather than the strength of their management. From 1798 to 1786.50 the S&P sold off 11.5 handles in 40 minutes.

The Asian majors closed mixed and in Europe 10 out of 12 markets are trading lower. Today's economic and earnings calendar starts out with the employment cost index, Redbook, Chicago Fed President Charles Evans speech on the economy and monetary policy in Chicago and Federal Reserve Chairman Ben Bernanke speech in Washington to the Washington chapter of the NABE.

Monday was a long day. From 10:30 am to 1:30 the ESZ13 stayed in a 2-handle range from 1795.50 to 1797.50. Whenever the S&P futures do that it usually means something is going to happen, and it did. In true fashion the ESZ13 reversed, going from testing the highs straight to a sell program, from searching for buy stops and making new highs to a big downward rip all in a matter of minutes. While our call was that everyone was getting too bullish, the Icahn headlines highlight what most people are thinking. Also, early yesterday morning JPMorgan's B Kasman said:

We expect tapering at the Jan meeting; tapering won't unsettle markets like it did in the spring and summer; "the disruptive midyear shift in the expected path of policy rates is unlikely to be repeated. Indeed, G-4 forward rate expectations have moved lower in recent weeks even as the news on growth has been positive. And in the week since a strong October US employment report shifted sentiment toward earlier tapering, end-2016 Fed rates expectations have remained stable. This delinking of tapering and G-4 rate expectations reflects changes in the macroeconomic landscape (particularly low inflation) and its interaction with an evolving forward guidance framework"

As we said in the view yesterday, when every Tom, Dick and Harry starts talking S&P 2000 and the contract is up as much as it is, there are reasons to be concerned. The overall price action of the S&P is one of making a high, pulling back, making a higher low and rebuilding its thrust to move higher again. There is no doubt that the short sellers play a major role in helping push the futures back up when the ES starts to short cover.

Click to enlargeWhat yesterday showed is how sensitive the S&P can be when it's up so much. This was not the first time Ichan has made remarks like the ones he did yesterday. He is a very smart and shrewd investor and is not wrong very often.

Our view

The markets can't keep going up forever. While this sounds obvious, plenty of fund managers and retail investors continue to act as though it can. At some point in the near future the Fed is going to start to taper. Can you imagine what it will look like with the Fed starting to cut back and the government heading back to the table for the debt ceiling negotiations?

Look, there was a party on Wall Street that caused the credit crisis and we are stuck with the bill, but the even uglier part of this is the stock market rally has left the general public with their pants down. I would have to ask, how many of you have benefited from the S&P up 160% from its 2009 lows? My guess would be not that many of you, and if you did catch the "big rally" it may be time to start thinking about booking some profits.

We think we see lower prices. Bernanke speaks tomorrow and the FOMC minutes come Wednesday. Lots of Fed speak floating around and lots of sell stops below…

As always, keep an eye on the 10-handle rule and please use stops when trading futures and options.

  • In Asia, 6 out of 11 markets closed lower: Shanghai Comp. -0.19%, Hang Seng -0.01%, Nikkei -0.25%.
  • In Europe, 10 of 12 markets are trading lower: DAX -0.35%, FTSE -0.46% .
  • Morning headline: "Icahn remarks echo investor caution over stocks"
  • Total volume: LOW 1.6mil ESZ and 5.7k SPZ traded
  • Economic calendar: Employment cost index, Redbook, Chicago Fed President Charles Evans speech on the economy and monetary policy in Chicago and Federal Reserve Chairman Ben Bernanke speech in Washington to the Washington chapter of the NABE.
  • E-mini S&P (Sep)1786.00-2.75 - -0.15%
  • Crude97.80-1.42 - -1.43%
  • Shanghai Composite0.00N/A - N/A
  • Hang Seng23657.811-2.25 - -0.01%
  • Nikkei 22515126.56-37.74 - -0.25%
  • DAX9193.29-32.14 - -0.35%
  • FTSE 1006698.01-25.45 - -0.38%
  • Euro1.3538

 S&P 500 new highs and the Carl Icahn reversal