S&P Down 3 In A Row As 2-Day Fed Meeting Begins

by: Danny Riley

On Monday the futures gapped higher and rallied a little further. Then in came what we call “rolling sell programs.” The S&P index arbitrage sell programs showed up almost every half hour until the S&P futures contract [^GSPC:SNP] made its low at 1767.

After the low the ESH14 rallied almost 20 handles before falling back on the close. A big sell imbalance pushed the futures back down to 1775.50 on the 3:15 futures close. After the close Apple (NASDAQ:AAPL) pushed the futures down to 1770.75 after reportedly selling fewer iPhones than expected.

The ESH14 rallied all the way back up to 1788 late in the day when the MiM [MrTopStep Imbalance Meter] came out showing -$520mil to the sell side. The ESH14 sold off from the first reading at 2:00 right into the 2:45 cash imbalance, the 3:00 cash close into the 3:15 futures close and after the bell when Apple reported.

Increased volatility and volume

The pits have been busy. From the 10yr Note options to the Eurodollar option, to the currencies to the index markets and into the grain room, everything has picked up. Metals, crude, beans, and gold all have been busy. From China to Brazil to Turkey to the U.S., everything is moving. The markets have gone from a slow grind to big ranges and volumes. It’s what traders live for and we don’t expect it to change anytime soon.

Two-day Fed meeting

In most cases the markets remain quiet during a two-day meeting until the decision is made on day two. We used to have a saying that you skip Tuesday and come Wednesdays at 11:00 just before the Fed makes its announcements. That’s not how we’re thinking this week. In fact, we think this week’s two-day Fed meeting will be a market mover.

The great unwind

They always talk about the “great unwind” out of the bond market, but with the S&P up 29% last year and up 170% since 2009 there is room on the downside. As more money was injected into the system, the S&P reacted in kind.

Now it’s time to find out how the E-mini S&P [ESH14:CME] will react as the Fed pulls away from its bond buying program. The only unwind we see is the Fed’s unwind away from cheap rates with a big question mark about how all the money they printed will be paid back.

There are a lot of unanswered questions surrounding the index markets right now, and with the Fed’s second $10bil taper one has to wonder where the S&P will be down the line…

The Asian markets closed modestly lower and Europe is trading mostly higher. Today’s economic and earnings schedule begins with the durable goods number, Redbook, S&P/Case-Shiller, consumer confidence, Richmond Fed Mfg. Index, 2-year note auction, Federal Open Market Committee starts two-day meeting and earnings from Comcast (NASDAQ:CMCSA), DuPont (NYSE:DD), Ford (NYSE:F), Pfizer (NYSE:PFE), Yahoo (NASDAQ:YHOO), American Airlines (NASDAQ:AAL), AT&T (NYSE:T), Amgen (NASDAQ:AMGN), Ace (NYSE:ACE), CIT group (NYSE:CIT), Corning (NYSE:GLW), Nucor (NYSE:NUE), Illinois Tool Works (NYSE:ITW) and Siemens (SI). Keep those chin straps handy, this is far from over.

Our view

A very smart friend that manages over $2bil in stock said most of the people he talks to are not seeing heavy stock selling. If they are waiting to find out if the Fed is going to taper they are nuts. The Fed is going to taper. The question is, with the S&P down 3 days in a row or down 61 handles, does the S&P accelerate to the downside or pop because everyone has already sold into it? To get that answer we may as well flip a coin.

As always, do not forget to keep an eye on the 10-handle rule and please use stops when trading.
  • In Asia, 6 of 11 markets closed lower: Shanghai Comp. +0.26%, Hang Seng -0.07%, Nikkei -0.17%
  • In Europe 7 of 12 markets are trading higher: DAX +0.41%, FTSE +0.31%
  • Morning headline: “S&P Futures Seen Higher Ahead of Two-Day Fed Meeting”
  • Total volume: 2.75 M ESH14 and 5.8K SPH14 contracts traded
  • S&P Fair Value: ( below futures)
  • Economic and earnings calendar: Durable goods number, Redbook, S&P/Case-Shiller, consumer confidence, Richmond Fed Mfg. Index, 2-year note auction, Federal Open Market Committee starts two-day meeting and earnings from Comcast, DuPont, Ford, Pfizer, Yahoo, American Airlines, AT&T, Amgen, Ace, CIT group, Corning, Nucor, Illinois Tool Works and Siemens.
  • E-mini S&P 5001786.25+10.50 - +0.59%
  • Crude98.55-0.22 - -0.22%
  • Shanghai Composite0.00N/A - N/A
  • Hang Seng21960.641-15.459 - -0.07%
  • Nikkei 22514980.16-25.57 - -0.17%
  • DAX9403.54+54.32 - +0.58%
  • FTSE 1006578.08+27.42 - +0.42%
  • Euro1.3661
 S&P down three in a row as two day Fed meeting begins