Friday's Market Minute: Red October?

The fourth quarter began with a sharp sell-off, resulting in back-to-back 1% daily declines in S&P 500 futures. The move brought the contract back to familiar ground in the trading range between 2,940 and 2,820 that persisted throughout August, and dashed bulls’ hopes for a new leg up.

Thursday morning in particular likely alarmed many investors, as the /ES saw a rapid 45-point plunge to lows near 2,855 on the back of weaker-than-expected economic data. But S&P futures rebounded with a vengeance at the 252-day EMA, clawing its way back to close in the green and confounding bears looking for the start of a major correction. The 10-Year Treasury future also finished up as well, which is curious given that stock futures and treasury futures have historically had more of an inverse correlation.

This seems indicative of the perverse logic that bad economic news is “good” news for the prospect of rate cuts, as the CME FedWatch tool on Oct. 1 listed a 62% chance of a 150-175bps rate cut for the Oct. 30 meeting and it surged up to over 86% as of this morning. Bulls may not be in the clear, though; soft manufacturing data and steep declines in industrial stocks like we saw this week typically bode ill for markets, especially when coupled with the prospect of a worsening global slowdown. Meanwhile, Russell 2000 futures saw a 50/200-day SMA Death Cross yesterday which suggests a downtrend.

Small-caps have fared the worst in recent weeks, so traders may want to watch /RTY for signs of a downward shift.

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