We are seeing history being made here folks...
One of the fundamental concepts of market characteristics is they generally don't go straight up or straight down, yet that is exactly what we are seeing in the e-mini S&P futures. We are seeing the stock indices achieving record-breaking streaks in regard to new highs and muted volatility levels. For example, yesterday the Dow posted the 10th positive consecutive close for the first time in four years and there have been only four occasions in history in which we've seen more than 10 positive closes in a row. The Dow also closed at a new high for the 10th consecutive day for the first time since January of 1987. Similarly, the annualized volatility thus far in 2017 is 5.9%, the tamest start to a year since 1966. Just as concerning, the S&P has gone 92 days without a 1% decline, this is the longest streak since 2006 and the S&P hasn't had a 1% intraday move since December 15th, this is the longest such streak in history!
The point is, the one directional trade and lack of volatility we are seeing in the ES is rare. And it is also dangerous. You might have noted a few of the years referenced above being on, or just before, significant market declines. We happen to believe this bull has quite a bit of room to run in the long-run, so we aren't looking for an 1987-style crash but it is worth noting that "never-ending" rallies can be unstable once they finally correct. Caution is warranted.
China and crude oil are running the show in the financial futures markets.
We aren't saying it is right, or even rational, but it is clearly China's economic data and volatility in crude oil that are in the driver's seat. Data out of China continues to disappoint despite some rather dramatic actions being taken by the country's central bank. We have to admit, we thought the futures markets (commodities and financials) would react more positively by moves made by the People's Bank of China. Instead, investors have taken their stimulus actions as reason to panic.
Crude oil has seen the largest percentage move in over two decades. In fact, we've seen the asset class move more in 4 trading sessions than some commodity markets move in years. In any case, those that have traded crude oil futures know that volatility is par for the course. The problem with oil market volatility is that it bleeds into the financial futures markets. Although yesterday's crude oil rally likely postponed selling the the S&P futures, today's weakness in oil was a good reason for equity traders to hit the sell button.
Citizens of Britain opted to take a bold stance, and the financial futures markets paid the price
If you were on the sidelines last night when the news hit, congratulations. It is easy to get sucked into the sorrow of knowing you missed out on some big market moves, but the reality is....most traders attempting to surf the waves of volatility wiped out. Either they were stopped out prematurely on the pre-Brexit realization, or they were too late to react and sold the lows in the ES (or bought the highs in the ZB). Many of my colleagues were watching the futures markets from afar, and happy to be experiencing one of the largest currency and Treasury moves in history with a bowl of popcorn in their lap instead of a bottle of whiskey.
We aren't even going to attempt to predict what Monday will look like. Nor will we make any trading recommendations until the chaos dies down. That said, we will be strongly considering adding to our short Fed Funds futures position early next week.
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Drug Stocks and Homebuilders bring stock indices down
Off the cuff comments made by the President-elect yesterday regarding US drug companies and a realization that higher trending interest rates (despite the recent recovery) is hurting the housing market, soured the equity market rally. As is usually the case, the market wasn't reacting to changes in fundamentals but rather expectations of changes in fundamentals. Accordingly, as we go on traders will either retract their initial reactions to these events or add to them. At the moment we are merely seeing back and fill trade as expectations are tempered. Today's trade wasn't a victory for the bears or a defeat of the bulls, it was simple consolidation.
The economic docket for tomorrow is busy, but we doubt the market will be paying attention to the second-tier reports (PPI, Retail Sales, and Michigan Sentiment). The fireworks will likely be next week with the Presidential inauguration (who knows what types of market-moving comments could be made on both sides of the isle).
The energy futures market is still in control
It will be difficult for the stock market to get much of anything going on the upside, without stability in the energy market. Both crude oil and natural gas have fallen to levels of despair for energy producers. Further, economies in oil rich areas such as Houston, and parts of New Mexico and Colorado, as well as the Bakken, are slumping significantly.
As is often the case with bubbles, sometimes they are only obvious after the fact. I should have known when my brother, a long-time member of the oil industry disclosed to me that oil field workers were paying New York style rents for run-down trailers near Farmington New Mexico (an oil rich area).
With oil valued above $100 it was clear the there was some exuberance that needed to be worked out, but few would have predicted a $30 handle a year and a half later. Nevertheless, here we are...and ironically, investors are praying for higher energy prices to avoid debt defaults that could send stocks reeling. Luckily, the Euro seems to have put in a long-term bottom..if this is the case, oil should eventually follow suit.
See our thoughts on this in the latest DeCarley Perspective: https://madmimi.com/s/ed5507
Wednesday's long squeeze quickly became the Thursday/Friday short squeeze
Although in the heat of the moment on Wednesday morning, most online and TV chatter suggested the capitulation had yet to come, it seems it already had. The ES has rebounded nearly 100 points from Wednesday's lows and crude oil has bounced nearly $5.00 per barrel. It is unfortunate that margin calls, and fear, likely left a handful of bulls watching the recovery from the sidelines after they had realizing massive loses. Unfortunately, when volatility picks up, so do these types of stories.
Although this type of stop loss running and squeezing out the weak hands has always been a part of the financial and commodity markets, I would argue that computerized trading has increased the frequency of exaggerated moves. In the same manner natural gas futures traded well beyond reasonable fundamentals for three for four days in December prior to a quick snap back rally, we saw the same nonsense in oil and, therefore, equities.
If it weren't for the no crying in commodities rule, we might have shed a tear. Luckily most clients were able to ride the storm with most positions in tact...and at least for today, the S&P, crude oil, and the 10-year note is all moving our way.
Bloomberg leaked the Fed Minutes early, taking traders by surprise
Bloomberg "accidently" leaked the minutes of the latest Federal Reserve meeting well over 10 minutes early. Although that might not sound like a big deal for most Americans, it translated into millions of dollars made and lost in the markets in the blink of an eye. Perhaps a timely release might not have experienced such a volatile market reaction.
According to the minutes, most officials believe the stars are not quite aligned for the first rate hike in nearly a decade. The next FOMC meeting is still four weeks away, so there is plenty of room for things to change, but it seems a September rate hike is relatively unlikely. After all, since the minutes were taken, we've seen China's economy fall off the edge of a cliff. Accordingly, U.S. stock indices erased massive gains on the news, but eventually the e-mini S&P futures gave the rally back.
Heavy commodities and light economic data weigh on stocks
Two consecutive days of sharp crude oil declines reminded traders of the chaos energy markets inflict on the financial markets. As a result, the e-mini S&P suffered moderate losses in overnight trade. However, it was weak economic data that kept prices under pressure throughout the session.
February retail sales came in at a a negative .1% for both the headline number and ex-auto. Although this was an improvement from January, it is hardly reason to go out and buy stocks. Similarly, the Empire Manufacturing data improved markedly from last month to a positive 0.6, but simply posting a slightly positive number isn't enough to get investors excited. Today's PPI data, reported a decrease in prices at the producer level of .2%. Thus, last month's hint at inflation was dissolved.
Tomorrow we'll hear about the latest data on consumer prices and housing starts, but I'm not sure it will matter to the market. All eyes are on the FOMC interest rate decision, which will be released at 2:00 Eastern.
Calculating profit, loss and risk in the stock index futures complex.
Before Putting Your Money on the Line…You Should Know the Basics. If you are like most people, you work hard for your money and the last thing you want to do is see it evaporate in your trading account. Throughout my journey in the markets, I have yet to find a fool proof way to guarantee profitable trading, but what I am certain of is that you owe it to yourself to fully understand the products and markets that you intend to trade before risking a single dollar. What you will learn from this article is merely a stepping stone to getting started in trading stock index futures, but without fully understanding the basic calculations of profit, loss and risk in the futures markets, you may never lay the foundation necessary to become a successful commodity trader.
When most people think of the commodity markets, they imagine fields of grain or bars of gold. However, a futures contract may be written on any commodity in which the underlying asset can be considered fungible. The term fungible purely means “interchangeable”, or having the ability to “comingle”, in trade. For example, you wouldn’t prefer to have one bushel of corn over another. According to the Chicago Mercantile Exchange Group, corn is corn as long as it meets the CME Group definition of a deliverable grade.
Financial products can be thought of in much of the same way. One unit of the S&P 500 index is just as valuable (or not) as the next. Therefore, financial products can also be considered commodities and trade similarly on futures exchanges around the world.
Don’t make the mistake of assuming because you are familiar with the equity markets, you can automatically apply that knowledge to trading in the future markets. Despite the underlying asset of stock index futures being based on indices which are household names, the manner in which they trade and the risk they pose to traders is dramatically different than their stock market counterparts.
Stock Index Futures Markets
In the U.S. there are four primarily traded futures contracts based on domestic stock indices; the Dow Jones Industrial Average (or simply the Dow), NASDAQ 100, Russell 2000, and the S&P 500. There are several other stock index futures available, but as a speculator you want to be where the liquidity is and many of them simply don’t offer that.
While stock index futures are all highly correlated in price, they have very distinct personalities. As a trader it is vital to be comfortable with the specifics of the futures contracts that you are trading and eventually the price characteristics of the underlying asset itself.
S&P 500 Futures
The S&P 500 futures contract traded on the CME, sometimes referred to as the “big board”, represents the widely followed Standard & Poor’s 500 index. This index is seen as a benchmark of large capitalization stocks in the U.S and is the most commonly traded stock index futures contract.
There are currently two versions of the S&P 500 futures contracts traded on the CME division of the Chicago Mercantile Exchange. Although the CME has ceased trading in most open-outcry futures pits on July 1st 2015, to make way for fully electronic execution in the futures markets, the futures exchange opted to keep the full-sized S&P 500 futures contract trading in a pit. Accordingly, traders can opt to execute their S&P 500 futures orders in the open outcry pit using the “big” S&P, or electronically using the e-mini S&P 500 futures contract.
The full-sized S&P futures contract has a point value of $250 with a minimum tick of .10. Floor brokers often refer to an S&P point as a “dollar”. For every point, or dollar, that the price moves higher or lower a trader will be making or losing $250. Thus, the contract size of the index is calculated by multiplying the index value by $250. For example, if the futures contract is currently trading at 2050.00 then one full sized S&P 500 futures contract is valued at $512,500. Similarly, a trader that goes long an S&P futures contract at 2089.40 and is forced to sell it due to margin trouble at 2053.20 he would have sustained a loss in the amount of 36.2 points or $9,050 plus the commissions paid to get into the trade. Once again, many traders aren’t willing to accept this type of volatility in their trading account and opt for the benefits of the e-mini version of the contract.
The e-mini S&P 500 is one fifth the size of its full-sized counterpart and unlike the larger version, the minimum tick is a quarter of a point or .25. With that said, the point value is $50 and the contract size is also one fifth the size of the original contract. If the e-mini S&P is trading at 2050.00 the value of the contract would be $102,500. Now that is more like it. An e-mini S&P futures trader is exposed to risk but relative to the “Big Board” contract it is much more controllable. When it comes to leverage, less is sometimes “more”.
A trader that goes long the e-mini S&P from 2035.00 and is able to sell the position at 2052.25 would have realized a profit of 17.25 points or $862.50. Again, this is figured by subtracting the sale price from the purchase price and multiplying the difference by $50.
2052.25 – 2035.00 = 17.25
17.25 x $50 = $862.5
Dow Jones Industrial Average Futures
Dow futures are listed and traded on the Chicago Board of Trade (CBOT) division of the Chicago Mercantile Exchange Group. The CBOT’s futures version of the Dow index closely follows the infamous Dow Jones Industrial Average comprised of 30 blue chip stocks.
In the past, the futures exchange provided futures traders with the ability to speculate on the DJIA in three different increments of risk and reward. However, in recent years the product listing has been streamlined a single Dow futures contract to increase efficiency; the mini-sized Dow (futures symbol YM). The DJIA mini-sized futures contract is often referred to in the industry as the “nickel Dow” because each point of movement in the futures market is worth $5 to a trader.
Unlike some of the true commodity futures contracts, the contract size of a stock index is not fixed. In fact, there is no contract size; instead, the contract value fluctuates with the market and is calculated by multiplying the index value by the point value (which is $5 in the case of the mini Dow futures contract). Accordingly, if the mini-sized Dow futures contract settled the trading day at 17,520 the value of the contract at that particular moment would be $86,250 ($5 x 17,520). Keep in mind that the margin for the mini-sized Dow is far less than $57,600 making it a highly leveraged trading vehicle. Margins are subject to change at any time, but the average seems to be between $4,000 and $5,000. As you can imagine, being responsible for the gains and losses of a contract valued at nearly $90,000 with as little as $4,000 could create large amounts of volatility in your commodity trading account. However, it is this leverage that keeps traders coming back to the futures markets for more. Unfortunately, it is the same leverage that has resulted in many bitter ex-futures traders.
Calculating profit and loss in the mini-sized Dow is relatively easy. Unlike many other commodities, or even financial futures, the Dow doesn’t trade in fractions or decimals; one tick is simply one point. Consequently, if a trader is long a mini-Dow futures contract from 17,257 and is able to liquidate the trade the next day at 17,348, the realized profit would have been 91 points or $455 (91 x $5). This is figured by subtracting the purchase price from the sale price and multiplying the point difference by $5.
17,348 – 17,257 = 91
91 x $5 = $455 (minus commissions and fees)
Not bad for a day’s work; regrettably, it isn’t always that easy. Had the commodity trader taken the exact opposite position by selling the contract at 17,257 and buying it back at 17,348 the loss would have been $455 plus commissions and fees.
NASDAQ futures are listed on the CME division of the Chicago Mercantile Exchange Group; it closely tracks the NASDAQ 100 index which includes the 100 largest non-financial stocks listed on the NASDAQ stock exchange. Prior to the closure of the futures trading pits at the CME, the exchange provided traders with two alternatives in speculation on the NASDAQ, a full sized contract and an e-mini version. However, the NASDAQ 100 futures contract now only trades in an e-mini version. This is probably a positive development to the retail trading community, because the original NASDAQ futures contract (full-sized), at $100 per point, was too large and volatile for most speculators.
The e-mini NASDAQ 100 futures contract comes with a point value of $20 (one fifth of the original $100 full-sized contract) reducing the contract size considerably. With the futures market at 4520.00, an e-mini NASDAQ contract is equivalent to $90,400 of the underlying index.
An e-mini NASDAQ trader long from 4505.50 and subsequently able to sell the position at 4532.75 would have been profitable by 27.25 points or $545. This is figured by subtracting the exit price by the entry price and multiplying the difference by $20.
4532.75 – 4505.50 = 27.25
27.25 x $20 = $545 (minus commissions and fees)
Generally speaking, the e-mini NASDAQ is the tamest speculative vehicle in the stock index futures complex in regard to daily profit and loss per contract held. Further, it also comes with the lowest margin requirement. For this reason, some beginning traders opt to trade the e-mini NASDAQ futures when dipping their toe into the futures arena. With that said, the NASDAQ 100 is far more susceptible to price moves dependent on a single stock (such as Apple) than a broader index such as the S&P 500 futures might be.
Russell 2000 Mini Futures
The mini Russell 2000 futures contract trades on the Intercontinental Exchange (ICE Exchange). It is the one and only stock index listed on ICE; consequently, it is also the most treacherous in regard to volatility. The Russell is believed to be a market leader, and it typically is, but sometimes leading the pack of stock index futures means excessive volatility.
A commodity trader long or short the Russell futures will make or lose $100 per full point of price movement. On an average day, the Russell will see a move from 3 to 8 points but on a volatile day it isn’t out of the question to see 15 to 25 points in price movement. If you’ve done the math in your head, you’ve realized that this equates to $1,500 to $2,500 in profit and loss per contract.
For instance, a trader that goes short a mini Russell Futures at 1221.00 and places a stop loss order at 1235.00 would be risking 14 points, or $1,400 before commission and fees.
1235.00 – 1221.00 = 14.00
14.00 x $100 = $1,400
If you are looking for a lot of bang for your buck, the Russell might be for you. Nevertheless, the massive and sudden market movements make it a risky venture.
It has been a busy day in the futures markets, so we will keep things short and sweet.
I hope anybody watching their futures quote board today had a puke bucket sitting next to their desk. It is becoming difficult to stomach the massive volatility we are seeing in financial and commodity markets; except of course if you happened to catch a ride on the right side of the market. I can honestly say, very few are making money in this environment because it takes nerves of steel and plenty of risk capital to stick with a position long enough to enjoy the benefits. On the other hand, option sellers are having a difficult time managing runaway prices in both futures and options. With all of this said, we are likely near the end of the chaos, at least for now.
There comes a point in these types of environments in which the speculators either run out of money, gumption, heart, or all of the above. When this happens pricing will get more reasonable in both the futures and the options markets, and volatility will collapse. If I was a gambler, I'd say that inflection point was either today, or at least in the coming session or two.
Despite a lack of economic data in the US, the markets found a reason to bring the ES to 2100ish.
The economic data schedule was skimpy in the US this week so investors were focused on news coming out of China. Word of Chinese exports tumbling 10% while imports also softened by 1.9% triggered global selling in stock indices. However, as has been the case since early 2016 market corrections are merely a signal for dip buyers to put money to work. Overnight and early morning losses were quickly shored up by afternoon trading.
On the lows of the day, technical oscillators were suggesting the sell-off had gotten ahead of itself. As it turns out, they were right. However, the lack of volatility has become silly. A 50 point decline in the S&P shouldn't constitute an oversold market.
Tomorrow's docket is relatively busy. We'll digest inflation data along with the latest consumer sentiment readings.
Holiday futures markets are around the corner
Perhaps the most valuable lesson I've learned in my decade (plus) time as a commodity broker is that holiday markets are not to be reckoned with. Volume is light and trading desks are filled with the second, and third, string staff. As a result, the markets can make dramatic and uncharacteristic moves. An example of this that still stings, is last year's Thanksgiving day crude oil futures collapse. The market was technically closed for the holiday, but the CME decided to let futures trade for an abbreviated session on the morning of Thanksgiving day. As a result of the light volume, and an ill-timed OPEC meeting, crude oil fell roughly $7.00 in single clip. In a nutshell, this is the time of year to keep trading light.
In regards to the S&P and Treasuries, the holidays have an interesting influence on trade. Nearly every year (I'm not exaggerating), we see an end of the year melt-up. It is often a very slow moving grind, but it eventually adds up to a significant move.
More pertinent to the current market; the week of Thanksgiving is statistically highly bullish. In fact, the Stock Trader's Almanac suggests that it might be a good idea to look for weakness prior to Thanksgiving to enter bullish trades, and strength after the holiday to exit. In fact, in the Dow, netting the day before and after Thanksgiving day has combined for only 13 losses in 62 years.
The Fed is as hawkish as they've been in years...
A hotter than expected inflation reading and more confirmation from the Fed that they will be seeking at least three rate hikes this year set a negative tone for Treasuries. However, the same news was seen by stock trader as a sign of economic growth and prosperity. Accordingly, the seemingly never-ending stock market rally logged another session of buying. What can we say? This is a bull market...and nothing can derail it. In recent weeks we've seen chaos in Washington, riots in the streets of our cities, a North Korean missile headed for our shores, but we've yet to see investors interested in taking profits in the equity markets.
If you ask me, the bulls are starting to get greedy (that said, we've obviously been wrong about the strength of this rally). According to our friends at Consensus, their bullish sentiment index has reached 76%. Generally speaking, this signifies an extreme that often results in a reversal. Likewise, The AAII Index suggests only 25% of those polled were bearish the market. The bus could be getting full...and we all know that that means.
China is ruling the roost, U.S stock index futures markets flailing
Today marked the end of this week's economic calendar, which leaves tomorrow's fate nearly entirely at the hands of tonight's Asian trading session. If we could put blinders on to block out Chinese volatility, we'd probably feel relatively upbeat about the prospects of the e-mini S&P futures from here. Unfortunately, China matters....**a lot!** The markets know this. With that said, we still expect the Chinese government to come to the rescue (again). Eventually, they'll find a way to get the job done for now (can kicking).
Light futures market volume, and surprisingly light volatility
Another wave of stock selling in China failed to excite the U.S. equity market bears. In our opinion, the bears are simply busy doing other things (not trading). In regard to both volume and volatility, this is one of the most sluggish markets we've ever seen during our time as commodity brokers. It feels like Christmas in August! (If you've ever followed the markets over the holidays, you know what I'm talking about).
We've been reminding our readers of the fact that China is a communist country with few rules. When things get bad, they simply fabricate stability through money printing, legal restrictions on stock selling, currency market manipulation, implementing constructions projects with no real purpose, etc. Last night the Chinese central bank reached into their bag of tricks, and pulled out one of the largest cash injections into their financial system in nearly 2 years to put the brakes on economic contraction. Despite the government's intention of stability, the reaction was panic.
It is early, but October has been the least volatile month...EVER.
If today was the end of the month, this would be the quietest October on record and it would also be the quietest month ever. Of course, it is too early to suggest that is what is in store for the markets come October 31st, but it should at least offer some perspective.
Further, it has been almost a year without a 3% drawdown in the S&P 500. This is the second longest run of its kind in history. If the market survives the next 10 days, it will beat the previous record. Keep in mind, 3% is literally a drop in the bucket. At today's price, that would be a mere 75 ES points.
We don't when the dam will break, but we do know it always does, eventually. Traders should be on their toes. Afterall, investor complacency is at an all-time high and historically such environments haven't ended well.
As mentioned in a previous newsletter, the University of Michigan stock market sentiment index measuring the percentage of investors that believe the stock market will be higher a year from now is at an all-time high. Similarly, credit spreads are near historical lows (this is the difference between the yield on high-risk securities and risk-free Treasury securities). Tight credit spreads suggest investors are reaching for yield and lack concern for economic turmoil (in short, they are complacent). The last time we saw such tight credit spreads was mid-2007, just prior to the financial collapse. We aren't predicting a repeat of 2007, we are simply saying the bulls should consider exercising caution. Is anybody familiar with "Old Man Partridge" from "Reminiscences of a Stock Operator"? The trend is only your friend until it ends.
The E-mini S&P traded lower two days in a row for the first time since late September.
Although losses were minimal, the ES managed to settle in the red on two consecutive trading sessions to close out last week. In a normal market this wouldn't be worth a mention, but in this market, it is a rare occurrence. The last consecutive negative closes took place on September 25th and 26th. Before that, you have to scroll the chart back to early August!
I doubt the _bulls_ are concerned in light of the fact that the ES is within 15 points of its all-time-highs. On the flip side, the _bears_ must be growing concerned over the fact that the seasonal tendencies from Thanksgiving through the end of the year generally call for higher stock prices.
That said E-mini S&P futures traders are holding one of the longest positions we've seen this year. Thus, one has to wonder if the bulls will soon run out of capital. After all, most of the bears have already been squeezed out of positions. This is true even in the stock market, the percentage of outstanding short positions on individual equity products is near record lows.
Generally speaking, the stock index futures markets stumble into October
The last week (or so) of September is notoriously weak for equities, and strong for Treasuries. We don't see any reason to buck the seasonal trend. After all, Friday's bloodbath on Wall Street is a sure fire sign that investors have not gotten over the mid-August stock market "crash".
Although the Fed meeting is behind us, we still have to worry about the details of Janet Yellen's speech on Thursday at the University of Massachusetts-Amherst. Oddly enough, the financial markets sometimes react to non-FOMC speeches than they do the official Fed meetings. Be prepared for volatility.
Crude and the Yen reverse yesterday's moves, so does the ES
Obviously, the market panicked a bit when in regard to the implication of a Yen rally. Although this is the highest we've seen the Yen in years, it is still historically cheap. Further, today's reversal suggests the unwinding of the carry trade isn't quite upon us. Accordingly, this should be somewhat supportive of the equity markets.
On another note, the greenback is still trading sluggishly, but it has yet to break support. In theory, weakness in the dollar should help push commodity prices higher, and eventually the stock market as well. As a result, we'll need to keep an eye on the DX support near 93.00.
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