S&P 500 Down 5 Of The Last 6 Trading Days

by: Danny Riley

The S&P 500 futures [^GSPC:SNP] have closed lower 5 out of the last 6 sessions. It’s been a nonstop sell fest and it doesn’t look like it’s over. After an initial uptick after yesterday’s open the S&P’s fell into a sell program with the ESH13 futures trading below fair value for most of the session.

The overall price action of the S&P has flipped since the last week of November. When the e-mini S&P futures were going up all year, the rallies were fueled by buying weakness, and over the last two-plus weeks that price action has flipped to selling off and failed rallies. Additionally the constant selling on the cash close leaves the S&P with no place to go but down. Liquidity is starting to dry up.

(Click to enlarge)

The first day of the two-day Fed meeting was a “chop shop.” The ESH14 sells off, bounces (looks like it’s going to keep going) then flips right back into an index arbitrage sell program. With so many news services blasting out the word “taper” the algos have been very active.

As we go into the final day of the meeting and despite the weakness, we still think today’s decision is a coin toss at best, and we also don’t think the Fed wants to blow up everyone’s holiday and year end. Below are a few paragraphs from research firm ISI. Despite all the gloom and doom, it’s not all bad out there …

In a few days there will be three important changes:

First, when 2013 is in fact over, and investors look at their returns, if stocks are indeed up +25% and treasuries show losses, there will be a tendency, given that many investors are underweight equities, to rebalance toward equities. In addition, investors may notice that in the years following +25% years, the stock market has done well. And investors will see that “experts” are forecasting the S&P at around 2,000 for the year-end 2014 (see the ten experts in this weekend’s Barron’s with a range of 1,900 to 2,100).

Second, when 2013 is in fact over, investors will see five-year performance numbers surge from zero for 2008-2012 to +100% for 2009- 2013 (cumulative price performance for the S&P). And investors may take note that the last time there was a surge like this, the stock market did well the following year (surge 1978 to 1979, followed by the S&P increasing +26% in 1980).

Third, many financial players are expected to have a forecast for “next year,” which today is 2014. In 17 days, “next year” will be 2015! The ten experts in Barron’s this weekend have S&P earnings of $119 on average (nobody was asked for 2015 forecasts). Given this central tendency of $119 for 2014, the central tendency for 2015 will be $125, a +5% increase. That will put the forward P/E at 14x. If investors start to put an 18x P/E on $125, then thoughts of 2,250 will come to mind.

At the end of the day no one knows for sure what the Fed is or is not going to do. What we do know is that the Fed is going to taper at some point, and we also know markets are not going to like it.

The Asian markets closed mostly lower (Nikkei +2.02%) and 10 out of 12 European markets are trading higher. Today’s economic calendar starts out with the second day of the FOMC meeting, MBA purchase applications, housing starts, EIA petroleum status report, 5-year note auction, FOMC meeting announcement, FOMC forecasts and the Fed chairman’s press conference. It was a long day yesterday and the first part of today should be the same.

Our view

The markets need clarity out of the Fed today. Let’s get the show on the road. The Fed’s on-again-off-again taper has caused a lot of downside “false starts” and that’s what the bears are afraid of.

Click here for this month’s Ned Davis expiration study.

As always, don’t forget the 10-handle rule and please use stops.

  • In Asia, 6 of 11 markets closed lower: Shanghai Comp. -0.13%, Hang Seng +0.32%, Nikkei +2.02%
  • In Europe 9 of 12 markets are trading higher: DAX +1.10%, FTSE +0.30%
  • Morning headline: “S&P Seen Higher Ahead of Fed Decision”
  • Total volume: 740k ESZ, 42k SPZ, 1.78mil ESH and 39k SPH traded
  • Economic calendar: Second day of the FOMC meeting, MBA purchase applications, housing starts, EIA petroleum status report, 5-year note auction, FOMC meeting announcement, FOMC forecasts and the Fed chairman’s press conference.
  • E-mini S&P 5001778.00+5.00 - +0.28%
  • Crude97.76+0.54 - +0.56%
  • Shanghai Composite0.00N/A - N/A
  • Hang Seng23143.82+74.59 - +0.32%
  • Nikkei 22515587.8+309.17 - +2.02%
  • DAX9180.14+95.02 - +1.05%
  • FTSE 1006502.33+16.14 - +0.25%
  • Euro1.376

 S&P 500 down 5 of the last 6 trading days