S&P 500 Futures: Day 4 And New All Time Contract Highs

Who is pumping up the U.S. markets? Large institutions, pension funds, large investment firms and mutual funds are doing the big unwind. They are unloading bonds and buying stocks. These big investment companies are seeing a potential economic shift and with Trump, and with the Senate moving fast to get his cabinet in place, the new administration is set to take action on his first day in the oval office and kill Obama Care.

Trump has warned of a shift away from the status quo and ‘business as usual.’ He has already sent out big warning shots on some of the big issues that there are going to be some big changes. Whether it’s China and trade deals, or Boeing (NYSE:BA) and expensive presidential jets, it seems no stone will be left unturned. The markets are quiet right now, but with the VIX trading down to 11.00 on friday, the risk will only rise as the VIX nears 10.

I told Trader Dave tonight that I thought the first six months of Trump talking office could end up a very volatile time for the markets. This is the time that I think we could see some big pull backs. What I am concerned about is, with the DOW up over 10% since his election, the level of room on the downside. No one is really talking about it, but with a new 12 months under way, and with the VIX trading down, there is clearly room on the downside for stocks. Will it happen right away? Lets see how the inauguration goes, but the S&P can’t keep going up like it has.

As many of you know, I worked for the PitBull on the trading floor, defending his orders. While I feel I was, and still am, ‘battle tested’ the PitBull was not like any of the other customers. From the big multi-billion dollar hedge funds, to the big banks, no one stayed on top of it like he did. He knew his way around the different trading desks and was always looking for the edge, but after we got to know each other he gave me the trust he gives few people, to work his orders and trade.

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I do not think there are very many people out there that he trusts like me. I was always part of the making money, not losing money. That said, I learned a lot from the Bull, and most of it was about his ability to ‘make money.’ People can talk all day, but when it came to trading, making money, and being up for the fight, the PitBull was at the very top of the list, and so were his skills.

Many years ago he complained about ‘program trading in the S&P futures. He said it would one day kill the game, like it did in the XMI. As more programs hit, the PitBulls work was almost always right, but his timing was affected. In prior years, when the S&P was falling, he would call me up and say ‘they look really bad,’ and I would come back saying ‘they were close to a buy,’ then he would say ‘buy 50 or 100 lots,’ but as time went by, it just got harder to do.

It never had anything to do with someone’s skill set, it has to do with keeping up with an impossible level of algorithmic and high frequency trading programs that make up over 70% of the volume, and don’t lose. Even in a low volume chop they make money.

While the PitBull is still trading options, he told me the other day the he has ‘not turned on his CQG futures trading platform in a few months.’ He went on to say that he thinks it’s impossible to make money trading the ES. That’s a very tall statement coming from one of the world’s greatest S&P 500 futures traders. He turned $30,000 into over $100 million, and today, he doesn’t have his platform up. That brings me to the story below.

One of my favorite money managers is Jeremy Grantham of GMO. In my view, he has always had a good view of the markets, and stuck out as one of the world’s best managers. But, like a very large percentage of hedge funds that ‘used to make money,’ his firm too has taken some big hits.

GMO was one of the world’s best known funds, and has seen assets drop by over $40 billion. While Grantham has not always been on the right side of the markets, he has had a good history of bouncing back. The 2000 to 2008 asset bubble was where he earned a lot of acclaim, but the fund has dropped from $124 billion in June of 2014, down to about $80 billion today.

There are questions about whether the 78 year old Grantham is capable of staging a turnaround. The firm has hired an acting chief executive who has been running GMO for more than six months, and the firm fired about 10% of its workforce, cutting some 65 jobs, in June last year. The flagship fund, the GMO Benchmark Free Allocation fund, missed out on the latest rally and was bearish about evaluations. The reason I am putting this up is because I believe this is a really tough time for the average investor, and when the big well known names take big hits, it’s not hard to see how out of whack things really are.

It was not long ago that Paul Jones of Tudor Investments was cutting staff. Here is a link to the story. I suggest you read it when you get time. http://www.wsj.com/articles/investor-known-for-calling-market-bubbles-largely-sat-this-rally-out-1483876837

Overnight markets in Asia were mixed and mostly quiet. Europe opened up leaning modestly to the sell side. In the U.S., the S&P 500 futures opened globex at 2272.25 and rallied early, trading up to 2275.25 going into Europe’s open. Since then, the ES has traded lower, traveling back down to 2267.75, 8.5 handles off the overnight high. The last print at 6:30 am cst is 2269.50, down 2.00 handles, with just over 67k contracts traded.

In Asia, 5 out of 10 open markets closed lower (Shanghai +0.54%), and in Europe 9 out of 11 markets are trading lower this morning (DAX -0.55%). This week’s economic calendar includes 22 reports, 8 Fed speakers, and 11 U.S. Treasury events. Today’s economic calendar includes the TD Ameritrade IMX, Eric Rosengren Speaks, Labor Market Conditions Index, a 4-Week Bill Announcement, a 3-Month Bill Auction, a 6-Month Bill Auction, Dennis Lockhart Speaks, and Consumer Credit.

There are only 9 trading days until Trump takes office. Will stocks sell off before then? Right now I am not worrying about that. I am only thinking about the ES trading at 2274.50 on Globex last night, and the inability of the index futures markets to sell off / pull back. In reality, there is only one side to the trade, and that the buy side. I am not sure whats going to derail the rally at this minute.

Today ALCOA kicks off the 2016 Q4 earnings season. Are stocks overvalued? I don’t know, they always say the S&P is going to be weak during earnings, and they always come out better than expected, then the future’s always rally.

Our view is that there are two ways to play this. The first way is to just buy the ESH17 when it has its midmorning or early morning sell off, there is one almost everyday, and hold for the midday to mid afternoon rip. Or secondly, you can sell the early rally, and buy the weakness when the ES pulls back. Personally I think the easier way to go is to just buying that stupid midmorning sell off.

Market Vitals for Monday 01-09-2017

As always, please use protective buy and sell stops when trading futures and options.

• In Asia 5 out of 10 open markets closed lower: Shanghai Comp +0.54%, Hang Seng +0.25%, Nikkei closed
• In Europe 9 out of 11 markets are trading lower: CAC -0.74%, DAX -0.55%, FTSE +0.08% at 6:00am ET
• Fair Value: S&P -5.34, NASDAQ -3.89, Dow -76.18
• Total Volume: 1.5m ESH and 4.3k SPH traded

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Written By: MrTopStep