The S&P 500 cash [^GSPC:SNP] closed down 7 points or 0.39% and the NASDAQ closed down 21 (-0.50%) while the Dow Jones Industrial Average closed 41 points (0.25%) higher during Friday’s trade.
Earlier in the week the rotation was buy NASDAQ, sell S&P. As the mutual funds start to reposition for the January month end it looked like the S&P futures [ESH14] were poised to take out the 1850.00 level, but as the day wore on so did the S&P and NASDAQ.
Sector rotation and the old S&P/NASDAQ spread
While it’s not as popular as in the past, many traders on the CME floor used to trade the S&P vs the NASDAQ futures spread. Big firms like Morgan Stanley and Salomon Brothers would quote it up in the pits and when the orders came in it usually meant some type of directional change.
A big fund would start selling the NASDAQ futures and after offering them down 10 ticks come flying in and buy the S&P. Rotations are an everyday part of the stock market. When one sector is over- or under-performing another, mutual and investment funds adjust positions by moving from, say, the broader market to tech or out of tech to Dow stocks. This is the funds’ way of keeping up with what’s hot and what’s not.
Sector rotation is an investment strategy involving the movement of money from one industry sector to another in an attempt to keep up with or beat the market performance.
The earnings season starts in earnest this week with 6 big Dow components and over 60 of the S&P 500 companies set to release earnings. Most traders we talk to think the December earnings may lend clarity on whether the markets will continue to advance or start to pull back as the Federal Reserve continues its taper process.
A reduction in the program to $65 billion a month from the current $75 billion could be announced at the end of the Jan. 28-29 meeting, which is the last meeting for outgoing Chairman Ben Bernanke. Most traders already think stocks were overvalued going into the end of 2013 and the beginning of 2014, but the S&P is less than 1% off the all-time contract high set last Wednesday, Jan. 15.
Keep it simple
With the S&P 500 up over 170% since its March 2009 low and up over 28% in 2013, the market should pull back this year. But one of the things we have learned about the S&P is it doesn’t do what you want it to do when you want it to. After making a new high it’s essential that the S&P take a rest.
After being in the S&P since 1985 I have learned to follow patterns, and the one that is the most notable is how the S&P leaps to a new high after selling off for a week or two. We fully believe this has to do with the lower volumes, what we on the floor call “thin to win.”
It takes a lot of buying power to sell the S&P off 22 handles in one day and then rally 28 handles in 2 days and make a new high. The problem is the lack of follow-through, which we also attribute to the overall low volumes.
As of Tuesday morning (Jan 21) the Asian markets closed mostly higher and in Europe 8 out of 12 markets are trading higher. Today’s economic calendar has no scheduled releases, a 3- and 6-month T-bill auction and earnings from AMD (NYSE:AMD), Delta Airlines (NYSE:DAL), IBM (NYSE:IBM), Johnson & Johnson (NYSE:JNJ), Unilever (NYSE:UL) and Verizon (NYSE:VZ), among 40+ major firms.
It seems like the markets are starting to heat up, but until the volume start picking up we just don’t see the sea change.
Nothing stays the same forever. Things that used to work don’t: a pattern like Mutual Fund Monday has been replaced by Misery Monday. The Friday Rip has been replaced by the late Friday Dip. While it’s the computers that make the patterns, by the time we see one and try and join, the pattern has been replaced by something else.
While the MrTopStep Trading Rules are based on patterns, most have not changed, but things like the Friday Rip die out as soon as they go from a small group of people knowing about them to the whole world.
Tuesdays have become big up-days for the S&P. It’s in some ways similar to the rotation stuff I wrote about above. While it was a crappy close last Friday, yesterday’s total Globex range was 4 handles. If the S&P is weak or pulls back early today we lean to buying it.
As always please keep an eye on the 10 handle rule and please use stops when trading futures and options.
- In Asia, 10 of 11 markets closed higher: Shanghai Comp. +0.86%, Hang Seng +0.45%, Nikkei +0.99%
- In Europe 8 of 12 major markets are trading higher: DAX +0.38% FTSE +0.08%
- Morning headline: “S&P 500 Futures Seen Higher; Turnaround Tuesday”
- Total volume: LOW 1.2M ESH14 and 11.9K SPH14 traded. During Monday’s abbreviated trading session only 83k ESH and 366 SPH traded
- S&P Fair Value: 1832.6 (7.65 below futures)
- Economic calendar: This week has few economic reports but a lot of earnings statements.
- E-mini S&P 5001829.50-4.75 - -0.26%
- Crude98.55-0.22 - -0.22%
- Shanghai Composite0.00N/A - N/A
- Hang Seng23033.119+104.17 - +0.45%
- Nikkei 22515795.96+154.28 - +0.99%
- DAX9724.43+8.529 - +0.09%
- FTSE 1006829.58-7.15 - -0.10%