Ukraine Conflict And The S&P 500 Month-End

Includes: DIA, QQQ, SPY
by: Danny Riley

The S&P 500 [SNP:^GSPC] rose to its 48th record in the last 12 months despite concerns that Russian President Vladimir Putin might invade Ukraine.

After a 5.8% drop in January and the beginning of February, the S&P went on to have its best month since October—up 4.3% on the month. The S&P rallied after consumer sentiment came in higher than expected, despite the record-setting severe weather that has slowed some economic activity. Many of the traders we spoke to on the floor said it did not seem to matter what the numbers were; good or bad, the S&P is going up.

The Dow Jones [DJI:^DJI], which was up 126 points at its high, closed up 49 points, or 0.30%. Friday’s close put the Dow just 1.5% off its Dec. 31 record close of 16576.66. The Dow’s 4% monthly gain was the largest since January 2013. The Nasdaq Composite Index [CME:NQH14], which was up 0.50% earlier in the day, closed 11 points lower or down 0.3%, to 4308.

We could talk about last Friday’s trade, but that’s old news. The S&P rallied to another record while 150,000 Russian troops were massing on the Ukrainian border; as we said last week, we doubted they were going to just turn around and go home.

Weekend headlines read by humans and news algos

The headline news picked up significantly over the weekend with the Russians surrounding most military bases in Crimea. While there were many comparisons to the U.S. invading Iraq and Afghanistan, the U.S. was not there to annex the countries.

Russia’s Putin plans to redraw its map again by taking over another country’s territory, claiming that it’s “protecting” its Russian-speaking population and throwing Russian flags up with no resistance. The map above shows the Russian land grab. So far there have not been any military clashes, but with the newly appointed head of Ukraine mobilizing his military we expect at least some skirmishes.

Volatility is back

The markets have not fully digested what’s going on in Ukraine. While many of the mainstream new outlets will blame Friday’s quick reversal on the Russians massing on the Ukrainian border, there were also other forces at work. With the S&P up so much on the month, the mutual fund buyers tend to take a step back on the last day of the month. In addition, some big funds did a month-end rebalance — sell S&P and buy bonds — that affected the S&P late in the day.

The main reason for the quick sell-off, however, was the news algos and all the weak longs that were sitting around looking for a free ride up. The sell-off in the ESH14 (CME S&P 500 E-mini futures contract) dropped from 1866 down to new lows at 1845.25 in a total of 87 minutes. It was an extremely quick reversal and then a pop back up to 1862 going into the close. We figured the S&P could be down Sunday night, and it gapped down 14 handles on the Globex open.

The Asian markets closed mostly lower and Europe 10 of 11 markets are trading sharply lower.This week is going to be busy. In addition to the Russians invading Ukraine, there are 28 separate economic numbers, 12 T-bill and T-bond announcements or auctions, 5 Fed governors speaking and the February jobs number on Friday. Today’s economic schedule starts with motor vehicle sales, Gallup U.S. consumer spending, personal income and outlays, PMI manufacturing index and construction spending.

While the headline “The Russians Are Coming” may sound funny, it’s really anything but. The Russians, like the Chinese, have been testing Obama for a long time and this test may be our president’s largest challenge yet.

Our view

There is not much the U.S. or anyone else can do. The Chinese are doing it and now the Russians are doing it and it’s called “annexing.” Simply put, it’s a land grab, and everything is going up in price. From wheat and corn to crude oil (up 2.2%) to UK gas for next month’s delivery up the most in 17 months or up over 10%. The Russian stock market is down 9% since it invaded the Ukraine and I have a feeling the sell-off is not over. The S&P has been going up in the face of a lot of bad news and is overbought and overextended.

With Russian boots on the ground and the Russian Duma now considering a bill to annex Crimea (link in Russian), it’s hard to think anything positive can come out of this. Our view is that the S&P can go lower from here, but we can’t sell the S&P down 20. In fact, we expect some type of early rally, then a reversal lower. The news headline algos will be targeting the downside stops and there are a ton of them, all the way down to 1810-1813 (initially) and below.

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

  • In Asia, 9 of 11 markets closed lower: Shanghai Comp. +0.92, Hang Seng -1.47%, Nikkei -1.27%
  • In Europe, 10 of 11 markets are trading lower: DAX -2.93%, FTSE -1.85%
  • Morning headline: “Stocks Drop as Havens Sought on Crimea; Corn, Wheat Jump”
  • Total volume: 2.12Mil ESH14 and 5.8K SPH14 contracts traded
  • S&P Fair Value: 1857.6 (futures 14.85 BELOW at 1842.75 as of 8:14 AM ET)
  • Economic calendar: Motor vehicle sales, Gallup U.S. consumer spending, personal income and outlays, PMI manufacturing index and construction spending.
  • E-mini S&P 5001847.00-10.50 - -0.57%
  • Crude98.55-0.22 - -0.22%
  • Shanghai Composite0.00N/A - N/A
  • Hang Seng22500.67-336.291 - -1.47%
  • Nikkei 22514652.23-188.84 - -1.27%
  • DAX9434.47-257.61 - -2.66%
  • FTSE 1006719.82-89.88 - -1.32%
  • Euro1.3768

 Ukraine conflict and the S&P 500 month end