S&P 500 Futures: Holidays NewHighs 2211.75

On Wednesday the S&P futures (ESZ16:CME) traded up to 2203.50. The days total volume including, Tuesdays nights globex session, was one million contracts. Wednesday night into Thursday morning’s electronic session helped push the futures up to another new all-time contract high at 2207.25, and during Friday morning’s abbreviated trading session, the ESZ16 popped all the way up to 2211.75. Combined total volume over the holiday was just 550k. If there was ever a truism about the S&P futures over a holiday, it has to be ‘thin to win.’

The markets reacted in-kind to the upside last week, and since the election night ‘limit down,’ the S&P (ESZ16:CME) has rallied 186.25 handles, or 8%. What helped push the S&P futures up so much? Was it the election win by Donald Trump? Was it the ‘best 6 months for stocks?’ Or was it the holiday and all the ‘thin to win’ trade? In all honesty, I think it was all of the above. Additionally, in the wake of Donald Trump’s victory, bank stocks have broken out. Several years of zero borrowing costs and new regulations have cost the banks hundreds of billions in income.

As the era of zero borrowing cost winds down, investors are piling into financial and bank stocks as the Fed continues to make up its mind about higher interest rates. It looks like the public has already voted. With the December Federal Reserve meeting only 13 trading days away, and the CBOT’s Fed Funds Rate futures showing a 95% chance of a rate hike, the squabbling continues.

In her August speech, Janet Yellen defended the the fed’s policy by saying that ultra low rates have “helped spur growth in demand for goods and services, lower the unemployment rate, and prevent inflation from falling further below our 2% objective.” Richard Fisher, president of the Federal Reserve Bank of Dallas who favored a less accommodative policy, now says “I think the problem here is that the low-rates policy has been too prolonged.”

The way I see it is the Fed has run out of time. With the new administration taking over, the change in guard will not be as accommodating as the old administration. This could that Janet Yellen’s days are numbered, and the days of easy money are going to come to an end. Donald Trump knows that the longer super low rates exist, the worse off the banks will be. According to CLSA bank analyst Mike Mayo, “Low rates have led to the lowest bank net interest margins in six decades, and lowest revenue growth in eight decades.”

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Overnight Asian equity markets traded higher. The ESZ opened the globex session gapping lower at 2208, and traded below that open during the majority of the session. Europe opened up with all major markets trading lower, helping to push the S&P’s down to 2199.50, 8.5 handles from the open. Since then, the ES has rallied back up to 2207.00, just five ticks from the overnight high, and down 4.25 handles on volume of 143k as of 6:45 am cst.

The S&P 500 futures are doing what we said bulls needed, which is to begin building a floor at the 2200 area. It’s going to be hard to run the buy stops higher until shorts have had more time to start building up, but today’s calendar is light, and leads to a thin-to-win type of trade. On the downside we are watching 2200 and 2191.50.

In Asia, 8 out of 11 markets closed higher (Shanghai +0.46%), and in Europe 11 out of 11 markets are trading lower this morning (DAX -0.87%). This week’s economic calendar is busy, including end of month, 27 reports, 7 Fed speakers, and 11 U.S. Treasury bill/note/bond events. Today’s economic calendar includes the Dallas Fed Mfg Survey, a 4-Week Bill Announcement, a 3-Month Bill Auction, and a 6-Month Bill Auction.

Our View: The holiday is over, but not everyone has returned, and that could mean more of the same. On the flip side, I think it’s fair to say that most of the shorts have covered. The ESZ has run all the buy stops I talked about over a week ago, and we could be getting close to some type of high / pull back. We have a very busy economic schedule and I suspect that will come into play. Our view is to sell the early rallies and buy weakness, keeping in mind how much the S&P has rallied.

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

• In Asia 8 out of 11 markets closed higher: Shanghai Comp +0.46%, Hang Seng +0.47%, Nikkei -0.13%
• In Europe 11 out of 11 markets are trading lower: CAC -0.77%, DAX -0.87%, FTSE -0.34% at 6:00am ET
• Fair Value: S&P -2.13, NASDAQ -0.87, Dow -33.32
• Total Volume: 561k ESZ and 3.3k SPZ traded

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Written By: MrTopStep