June Quadruple Witch: Not Such A Big Event Anymore

Today is the June quadruple expiration of the June S&P 500 futures SPU and other contracts…Can you believe how fast the first five-and-a-half months have flown by?

It’s a good time to go back to what I am good at and that’s talking the markets—just plain price action, buying and selling—not macroeconomics, politics, or the long-term security implications of US-Iran cooperation in Iraq.

In a 24-hour news cycle, with dozens of news channels and hundreds of blogs, it’s easy for traders to become overloaded.

I have 6 large screens I use to follow the markets in my office and I told my friend Chance Stroot that I need “two more.” I am not sure I am smart enough to digest 6 charts, news feeds and fighting the algos all day.

All those years ago

A long time ago all a trader had to do was jump into a pit. As a local or a “scalper,” direction didn’t matter. If you got the “edge,” meaning an order filler would buy and sell with you, you could get in and get out all day and in most cases make money.

Like our friend Paul Perlin, a local trader for decades—he didn’t care what he was trading as long as there were lots of orders to trade off of or trade with. As the order flow went, so did they.

Then, as order flow went electronic, one by one the order fillers and locals simply went away, too. Today’s electronic traders do not get to see big buy and sell orders like we saw in the pits. There is no front-running or knowing where the stops are—and that’s good, though it’s been replaced by some new tricks—but one vital thing is missing: the human element.

Before electronic trading a trader could gain a “feel” for the direction. Before you call that just nostalgia and imagination, consider that neuroscientists have proven that the subconscious parts of our brain are often aware of new information long before our rational brain is able to process it.

We may not have been neuroscientists, but we knew it by experience. All the news and order flow was how many traders read the markets, today’s trading platforms—and we have access to the most sophisticated of them— do not provide any of that.

The June Witch is back

Traders are always looking for reasons for the markets to be busy, but that’s not how the “quadruple witching” goes anymore. Part of the reason this quad witch won’t be busy is because with the E-mini S&P futures ESU rallying so much over the last few days, we think most of the rolling associated with the expiration was done yesterday as the ESU14 approached 1950. If they did not roll higher yesterday they did earlier in the week.

The Quad Witch used to be one of the largest events in the index markets. Every big trading shop in the world had a position in the futures, and as the futures and options expired it brought thousands of buy and sell orders on the open.

Today all we hear is the ring of the bell and maybe the hum of computers on the desk. There is no more pushing and shoving or jostling for a position in the pit.

The “top step” of the pit, which used to be the most prized spot in any exchange in the world, is down to 3 or 4 brokers and 40 traders on a good day. In most cases, the S&P will see some type of trade in the first and last 30 to 45 minutes of the day session. We don’t expect much in between.

The Asian markets closed mostly lower and Europe is trading modestly higher. Today’s economic schedule starts with the June quadruple witching , Atlanta Fed business inflation expectations number and earnings from CarMax (NYSE: KMX) and Olive Garden and Red Lobster parent company Darden Restaurants (NYSE: DRI).

S&P Futures Up 8 in a Row

Our view: The S&P cash study shows the Friday of the June Quad Witch up 21/ down 9 of the last 30. We still think the S&P is going up but we are a little concerned with how quickly the ESU14 has already rallied (May 29 +8.8
May 30 +3.6, June 2 +0.30, June 3 +0.30 ,June 4 +3.6, June 5 +12.8, June 6 +10.8, June 9 +0.90, June 10 +0.30, June 11 -6.00, June 12 -13.4, June 13 +5.1, June 16 +0.90, June 17 +4.6, June 18 +15.3).

As of yesterday’s close the ES has been up 14 of the last 16 days. For the next week or two, I think the ESU is going to do exactly what it’s been doing: get a few days of pullback and then press new highs. This is not going to stop.

Our view is after the first 30 to 45 minutes the ESU14 goes into a slow grind that last until 2:30 CT. Stocks may have risen for seven days straight, but it’s Friday, known for the Late Friday Rip. You can take it from there…

As always, please make sure to use protective stops when trading futures…

• In Asia, 9 of 11 markets closed lower: Shanghai Comp. +0.15%, Hang Seng +0.11%, Nikkei -0.08%.
• In Europe, 7 of 12 markets are trading higher: DAX +0.23%, FTSE +0.31% at 5:45 am
• Morning headline: “S&P Futures Seen Higher Ahead Of June Quadruple Witching”
• Fair value: S&P -795, NASDAQ -8.25, Dow Jones -79.94
• Total volume: 1.4mil ESU and 3k SPU traded
• Economic calendar: Quadruple witching, Atlanta Fed business inflation expectations and earnings from CarMax KMX and Olive Garden and Red Lobster parent company Darden Restaurants DRI.