S&P futures: The rips, the dips and the MIM

By: Danny Riley

The Pit Bull said a friend told him 30 years ago never to trade in the last week of August. That may be true for some, but not for the “trading junkies.” Let’s face it, where there is a will there will always be a way.

You probably have other morning reads than our morning call. We are never going to be a CNBC or a Fox and we don’t want to be. Most of the people they interview were never part of any major stock market event like we were. Our desk operation played a major role in many of the big selloffs and crashes. If the desk was not selling a few thousand big S&Ps it was putting in bid after bid for sell programs. When the world markets were seizing up, it was our desk with 6 or 8 clerks all firing hand signals into the pit, buy, sell, buy, sell, all day long! Everyone banging into each other, clerk pushing clerk, cards, orders, and the unmistakable smell of the floor. It was so manly I wish I could go back for just one day.

The $1.5 million-a-handle order
I have never felt the way I did during the ’87 crash when I took an order to sell 3,000 big S&Ps at $1.5 million a handle, picking up the program line and asking for bids. The amount of money made on that order in the pit that day was astonishing, as was the level of programs it took to complete the order. Every time I sold 200 or 300 lots, at least half, sometimes all of them, hit program bids.

The futures were being sold way below where the S&P cash was trading (discount) and the only bid in the S&P pit was for a sell program. It took over 16 full handles to fill the order. At $1.5 million a handle. Even today, with only 50 or 60 locals left in the pit, they are still waiting for that one big down day.

Stops and more stops
Maybe the coders and engineers who write the algorithmic futures trading programs say their systems don’t chase buy and sell stops, but we know for a fact that they are lying. Everyone from a retail trader to a mega hedge fund knows that’s how it works. When everyone is short and running the last of the downside sell stops, the algorithms start searching for upside stops that create the index arbitrage buy programs. Yesterday after the FOMC minutes hit the tape, the futures hit sell stops down to the new daily low and then reversed ship and rallied 17 handles. But that was not the end of it. After making new highs, the ESU sold off 4 or 5 handles from the new high, then the 2:00 MIM reading showed -67% sell side and $160mil to sell. By the time the 2:45 imbalance showed MOC sell $600mil, the S&P had sold off from the 1650 level all the way down to the 1636.50 to 1638.50.

MIM MrTopStep Imbalance Meter

Nothing works every day, and while the MIM has had its share of missed signals, it has really proven itself over the last few days. When the S&P is in a downtrend and rallies late in the day and the MIM comes out big to sell, the S&Ps react in kind. There are plans to “lock down” the MIM — no longer put out the signals on Twitter and blast it out all over the place, and raise the price. If you have yet to add the MrTopStep Imbalance meter to your toolbox you better hurry.

For today
The Asian markets closed mixed and Europe is down across the board. There was a lot of shake, rattle and roll yesterday in the S&P futures and we suspect we could be in for more of the same today. Today we have a total of 9 economic numbers, Richard Fisher from the Fed speaks and the Jackson Hole symposium starts. If you didn’t have your chin straps on yesterday you may want to have them close by.

The S&P was all over the place yesterday and the volume of over 2mil ESUs showed it. Let’s face it, the S&P is breaking down. That doesn’t mean it can’t bounce, but we don’t get the feeling a big rally is coming anytime soon, and if the spoos do rally it will be time to buy some puts. Like many market forecasters I agree the markets are going down, but I still think the S&P will rally going into the end of the year.
Our view: Selling gap up opens has worked very well recently. Ideally we want to buy early weakness and sell the rallies (strength) … 1620 is a key downside level.

As always, keep an eye on the 10-handle rule and please use stops when trading futures.

Lastly, please find an hour to watch the video of the Pit Bull speaking at Amherst College. He has been my friend for a long time but I still love hearing him talk. “A Market Wizard Speaks: Marty Schwartz speaks at Amherst College, Spring 2013.” At Marty’s request, we are offering the full video free of charge to you and the world. Few people trade as well as Marty does. Even fewer are willing to share what they’ve learned.

• In Asia, 9 of 11 markets quoted closed lower (Shanghai Comp. -0.28%, Hang Seng +0.36%, Nikkei -0.44%).
• In Europe, 11 out of 12 markets are trading higher (DAX +1.05%, FTSE +0.73%).
• Morning headline: S&P Futures Seen Higher Ahead of Key US Data
• Total volume: 2.1mil ESU and 10k SPU traded
• Economic calendar: Jobless claims, PMI manufacturing index, FHFA housing price index, leading indicators, EIA natural gas report, Kansas City Fed mfg. index, Richard Fisher speaks, Fed balance sheet and money supply