S&P 500: Never a dull day, always an opportunity

The US equity benchmark S&P 500 [SNP:^GSPC] closed up 9 points or +0.50% to 1867.00. After an early morning rally the S&P reversed and then rallied again in what most traders said was a very choppy session. The Dow Jones Industrial Average [DJI:^DJI] gained 103 points or +0.60% and the Nasdaq Composite that rallied sharply after the open and was up nearly 50 points closed up 7 points or +0.20%.

Quarter-end rotations

On Monday several tech stock bellwethers closed weak: Facebook – 4.67% , Google – 2.12%. On Tuesday most of the stocks that were for sale were being bought back again, but MS, GS, BAC were all for sale late in the day. This is how the mutual funds mark up and mark down stocks at the end of the quarter. Funds tend to sell the big winners and bid up some of the weaker stocks. This type of buying and selling will likely go on right to the last trading day of March (next Monday). This leaves 4 full trading days until then.

T+3

The buying and selling of stocks will pick up significantly going into the end of the week as T+3 takes over. T+3 is a shorthand for trade date plus three days indicating when securities transactions must be settled. T+3 means that when a security is purchased, payment and the securities certificate must change hands no later than three business days after the trade is executed. The first day of the three-day settlement cycle starts on the business day following the day that a security was purchased or sold. For example, if a stock is purchased on Friday at any time during the day, Saturday and Sunday are not considered business days, so the three-day clock doesn’t start running until Monday. A payment or check must arrive at the broker’s office by the close of business on Wednesday.

Walk Away Trade

One of the MrTopStep trading rules is called the “Walk Away Trade.” This used to be a big winner but over the last several years it has had less of an effect. The idea is that on the last day of the quarter the mutual funds have used up most of their buying power associated with marking up stocks, leaving the S&P [CME:SPM14] susceptible to a late afternoon decline.

The Asian majors closed modestly higher and in Europe 11 of 12 markets are trading higher, DAX +1.14%. On today’s economic calendar are St. Louis Fed President James Bullard on a panel in Hong Kong discussing unconventional monetary policy, MBA purchase applications, durable goods orders, PMI service flash, EIA petroleum status report and a 5-year note auction.

Our View

The S&P is trading in a big chop. When the crowd gets long the Emini S&P 500 [CME:ESM14] goes down and when the crowd gets short it goes back up. Every time the ESM14 sells off 10 to 20 handles it goes right back up. At the end of the day the S&P was back and filling again. Asia and Europe are up across the board this morning. Last week the S&P took a stab at the highs and failed. This is all part of what the Pit Bull calls “water in the bathtub.” The ESM sells off and gets people to sell. Then when the short covering comes in it widens out the premium levels, causing index arbitrage buy programs that help push the futures back up to new highs. One hand washes the other. Our view is the S&P is trying to make new highs again, but it won’t go without some ups and downs. We lean to selling rallies and buying weakness. As always, keep an eye on the 10-handle rule and please use stops when trading futures and options.

• In Asia, 9 of 11 markets closed higher: Shanghai Comp. -0.18%, Hang Seng +0.72%, Nikkei +0.37%
• In Europe 11 of 12 markets are trading higher: DAX +1.14%, FTSE +0.54%
• Morning headline: “S&P 500 futures seen higher ahead of US- EU summit”
• S&P Fair Value: 1857.72 (futures 5.93 higher at 1867.25 as of 7:19AM CT)
• Total volume: 1.65mil ESM and 5K SPM traded
• Economic calendar: James Bullard speaks, MBA purchase applications, durable goods orders, PMI service flash, EIA petroleum status report and 5-year note auction

• E-mini S&P 5001881.75+8.00 - +0.43%
• Crude98.55-0.22 - -0.22%
• Shanghai Composite0.00N/A - N/A
• Hang Seng21887.75+155.43 - +0.72%
• Nikkei 22514477.16+53.97 - +0.37%
• DAX9471.67+133.27 - +1.43%
• FTSE 1006639.25+34.36 - +0.52%
• Euro1.3793