Only two reasons for the S&P drop: the Fed and the Algos

By Danny Riley

After running all the buy stops up to 1800.00 the S&P 500 index (ESZ13:CME) reversed this week but is still less than 20 handles off its all-time contract high.

The Asian markets closed mostly lower and in Europe they are mixed. Today’s economic and earnings calendar starts out with St Louis Federal Reserve Bank President James Bullard speech on the economy and monetary policy in Rogers, Arkansas, Jobless Claims, Producer Price Index, PMI Manufacturing Index Flash, Federal Reserve Gov Jerome Powell speech on OTC derivative reform to Clearing House Association in New York., Philadelphia Fed Survey, EIA Natural Gas Report, 5- and 7-year note announcement, Richmond Federal Reserve Bank President Jeffrey Lacker speech on the economic outlook in Asheboro, North Carolina and earnings from Abercrombie & Fitch and Target.

Little Fed Rock & Roll

If you’re surprised by the Fed headlines and the subsequent sell-off you shouldn’t be. We said there would be a Fed overload this week and yesterday’s jolt down in the ESZ13 should be anything but surprising. And guess what? There is a lot more Fed speak scheduled this week. Today the Fed’s James Bullard starts the day out at 7:00 CT and then Jerome Powell takes over at 8:45 CT and Jeffrey Lacker hits the deck at 11:30 CT. Friday morning Ester George speaks at 7:40 AM CT and the Fed’s Daniel Tarullo finishes the week off at 11:15 CT. One would think they’re all running for office and it’s the week before the election.

I am not going to look at any other web sites for anything they have to say about why stocks sold off yesterday. The first reason is the MrTopStep S&P “Stop-o-meter” was heavily pointing to the downside. The recent run up took out all the buy stops up to 1799.50. Since then the Algos have been going nuts running up and downside stops all day long.

Algorithms that trade the news

The other reason is the new headline algorithms. As soon as the Fed taper headlines hit the tape the algos locked on to the downside sell stops and in came a flood of index arbitrage sell programs. I know this many not be as clean as CNBC’s Bob Pisani’s recap but it’s how the S&P sold off.

Any other reasons you hear are about as probable a cause as Maria Bartiromo’s move from CNBC to Fox Business.