S&P 1900: Never That Far Away

A rally late in the trading day pushed the S&P 500 futures SPM higher as the FOMC minutes were released with an overall positive assessment of the economy. The major risk highlighted in the Fed meeting was that of a “persistent slowdown” in the housing sector—the sector that started the whole financial crisis.

The S&P spent the morning retracing Tuesday’s drop and then consolidating in a tight, choppy range. Overall the day was marked by low volume and choppy, range-bound price action.

Where has all the money gone?

The ongoing lack of volume raises the question, “Where is the money?” One answer may be that investors are reluctant to get into another round of fresh buying into a market less than 1% from all-time highs and with two years since the last 10% correction.

Another answer may be dark pools, private exchanges that have, up to now, provided a largely hidden place to buy and sell stocks. Recent rule changes have opened up those dark pools to greater scrutiny. By the SEC’s own estimates, dark pools now account for 14% of all stock trading volume, or over $20 trillion.

Some “dark pool” exchanges provide a place for HFT traders to apply their methods. MrTopStep has been very clear in our opinion that much of it is computerized front-running. If there are venues outside the established exchanges that allow high-frequency traders to access exchange data, but not have to show their own trades, that makes the front-running even easier to get away with.

Wholesale market makers and dark pools

Add to that 14% the 19% of volume contributed by wholesale market makers. They pay brokerages to send orders directly to them, not to the exchanges. The market makers then fill the orders in-house. Together, dark pools and wholesale market makers may account for one-third of stock trading.

Whatever positive role market-making firms may play, they also remain unregulated, until now. Michael Lewis’s book Flash Boys seems to have finally given the SEC enough political cover to demand more transparency. It’s no surprise that Bank of America has just announced it is closing its market-making unit rather than submit to the scrutiny.

Keep calm and trade on

Let’s be clear, however: none of this means the average retail investor cannot trade profitably. Our professionals do it day after day in the MrTopStep Trading Room. Sure, some aspects of the game are rigged—but they always have been. But there are still price patterns and clear trends for those willing to look for them.

The S&P 500 added 0.8 percent to reach 1,888.03 yesterday. The E-mini ESM went to 1890.50 overnight. This puts it just 0.5 percent away from the record reached on May 13. The Dow Jones Industrial Average (DJI:^DJI) climbed 158.75 points, or 1 percent, to 16,533.06. The Russell 2000 was up 0.5 percent, while the Nasdaq rose to the highest level since April 3. About 5.3 billion shares changed hands on U.S. exchanges, 20 percent below the three-month average.

The Asian markets closed higher and in Europe 8 out of 12 markets are trading higher. Today’s economic calendar includes Jobless Claims, Chicago Fed National Activity Index, PMI Manufacturing Index Flash, Existing Home Sales, Leading Indicators, EIA Natural Gas Report, Kansas City Fed Manufacturing Index, 2, 5 and 7 Year -Note Announcements. San Francisco Fed President John Williams speaks and we expect the Fed Balance Sheet, Money Supply, and earnings from Best Buy Co BBY, Hewlett-Packard Company HPQ, Dollar Tree DLTR, Sears Holdings (NASDAQ: SHLD), and The Gap (NYSE: GPS).

Our View

From today’s high, a 10-handle move would put the S&P back at the all-time high just below 1900. On Wednesday we said the ES had to go down before going up. Well, it’s done that, both last Thursday and in this week’s Turnaround Tuesday that never happened.

Now we have a positive FOMC minutes behind us and if the jobless claims and existing home sales numbers aren’t surprisingly negative, we expect a push to the big number. The bullishness in Asia and Europe reinforce the optimistic tone.

We also expect it to be, as it has been for a while, choppy and low volume. An additional factor is the US Memorial Day holiday. Exchanges will close Monday, May 26, but many traders may simply start their weekends today. We lean to buying weakness and taking profits quickly rather than waiting for big moves.

If the low volume does anything, it may just set us up for a “thin to win” trade that pushes the market up. After that, watch for a selloff as longs look to take profits ahead of the holiday weekend.

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

• In Asia, 10 of 11 markets closed higher: Shanghai Comp. -0.18% , Hang Seng +0.51%, Nikkei +2.11%.
• In Europe, 8 of 12 markets are trading higher: DAX +0.16%, FTSE +0.07%
• Morning headline: “Global stocks rise on China manufacturing”
• Fair Value: S&P -2.65, Nasdaq -1.43, Dow -23.15
• Total volume: 1.36M ESM and 5.16K SPM traded
• Economic calendar: Jobless Claims, Chicago Fed National Activity Index, PMI Manufacturing Index Flash, Existing Home Sales, Leading Indicators, EIA Natural Gas Report, Kansas City Fed Manufacturing Index, 2, 5 and 7 Year -Note Announcement, John Williams from the Fed speaks, Fed Balance Sheet, Money Supply and earnings from Best Buy Co BBY, Hewlett-Packard Company HPQ, Dollar Tree DLTR, Sears Holdings SHLD, and The Gap GPS