Who's to Blame?

By Danny Riley

There have not been many back-to-back down days in the S&P lately, and after a lower open, a small rally and selloff, the S&P did exactly what it has done since the first week in June: back and filled. The SPU made a high around the 1350 level on June 19 and then another selloff and low on June 25.  The next rally pushed the futures back up to the 1370 highs on July 3 and then another pullback and low made on July 12, another peak on July 23. another selloff and low on July 25, new highs on July 27, another little pullback and low on Aug. 2 and then a slow grind up to the most recent highs.

While there will always be reasons for the markets to go up or down, yesterday’s reason was the Fed minutes. We said several weeks ago that both the Fed and the ECB were posturing toward another round of quantitative easing and just the talk of it would support the markets. We also have been saying we feel strongly that at some point the Fed will act. Depending on who you talk to about yesterday’s Fed minutes, most feel the deal is not done, but that’s not how Bill Gross of Pimco sees it. Just after the Fed minutes’ release he shot out a tweet saying  “Fed minutes make QE3 and extended period language an 80 percent probability. Front-end curve friendly.” While many Wall Street strategists think the Fed is still debating, it does seem like it is prepared for some type of action, and with the fiscal cliff approaching at the end of the year it may be holding back until there is a clear need to act. The minutes also pointed to other forms of easing like extending the existing commitment to keep interest rates at historically low levels. In other words, the credit crisis that started in 2007 is far from over.
This is not getting any easier. More people are losing jobs again. Personally, I do whatever I can to cut back on buying nonessentials. More and more Americans are staying away from buying homes and new cars. The American public remains wary of big-ticket purchases, preferring to rent or lease. With an ever-shrinking “middle class” becoming less optimistic, it’s clear to see it is getting harder and harder for the middle class to  maintain their living standards yet do better. It’s just not happening. According to the Pew Research Center, it is harder to get ahead than it was 10 years ago. The median income for the middle class over the last 10 years has fallen precipitously, which explains the gloomier forecast most people see for the future. They say  a family of four needed to make about $70,000 each year to keep up a middle-class lifestyle, but I don’t believe that. I know what a $70,000 salary looks like and I make more than that and only have one child.  Trying to keep your bank on $70,000 for four people sounds impossible. If you want to learn more about how this is shaking out, the Pew Research report “The Lost Decade of the Middle Class” is a good read. It lays out the decline of the American middle class.

http://www.pewsocialtrends.org/2012/08/22/the-lost-decade-of-the-middle-class/

Our view:
The S&P still feels a bit tired. After a nice push up, European stocks pared their gains. While we still think higher ,we also get the feeling the S&P is not ready for another leg up until it back and fills a bit. We lean to selling the early rally and then buying weakness after the S&P comes back down. As always, keep an eye on the 10-handle rule and please use protective stops.

• It’s 6:00 a.m. and the ESU is up 4.5 handles, crude is up 76 cents at 98.02 and the EC is trading 1.2561, up 26 ticks.
• In Asia 10 out of 11 markets closed higher (Hang Seng +1.23).
• In Europe 10 out of 12 markets are modestly higher.
• Today’s headline:  “European Shares Pare Gains After Early Rally.”
• Economic calendar: We have an extremely light economic calendar this week. Today: Jobless claims, PMI manufacturing index flash, new home sales, FHFA home price index, earnings from Gold Fields, Hormel Foods. Friday: Durable goods orders, USDA food prices outlook.

• VOLUME (LOW): 1.67mil ESU and 12.5k SPU traded
• SPREADS:  300 SPU/Z spreads traded
• FAIR VALUE: S&P +5.00,  Nasdaq +6.00

MrTopStep Closing Print Video: http://www.mrtopstep.com/videos/?id=25231

Wednesday’s S&P 500 futures wrap-up:

Buyers were on the sidelines overnight as equities back and filled around the globe. Buyers were also sidelined due to continued concerns regarding the health of China’s economic engine in light of recessionary concerns. Last night’s disappointing exports out of China on the heels of yesterday’s disappointing chain store sales, back to school – consumer spending concerns kept the equity markets in check in front of pending news. However, the bears failed to press the equities during the Globex/morning sessions as the treasuries were up sharply, adding to yesterday’s modest gains. FOMC minutes, PMI numbers, a pickup in headlines and economic reports also held traders at bay, adding to the chop.
mts2 (13:01:41): OverView:—-Aug 1 FOMC minutes show continued worries about labor market and a desire to evaluate OT-2, but also disclose this increased reaction function: “Many members judged that add’l monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable (econ) strengthening.” On stimulus tools: 1-extension of low rate pd: many favor & will revisit in Sept, “might be particularly effective if done in conjunction with indicating a highly accommodative stance was likely to be maintained even as recovery progressed”; 2-asset buys: Many said buys “could provide additional support for recovery both by putting downward pressure on longer-term int rates and by contributing to easier financial conditions more broadly.” Some said a new buy program might boost business/consumer confidence. Discussed by Tsys vs MBS, as staff analysis shows both have “substantial capacity for additional purchases without disrupting mkt.” Many said new buys “should be sufficiently flexible to allow adjustments.”

Note to self: Jackson Hole month end…
MEDLEY – SUMMARY: Fed discussion of possible approaches to delivering a fresh round of bond purchases has elevated as financial markets have been scaling back their expectations that it will be delivered before the presidential elections.

Wednesday started with 246k ESU and 900 SPU traded on Globex, trading range 1413.50 – 1406.50 / Tuesday’s range 1424.60 – 1408.00, settled 1412.50 down 2.2 handles. The RTH’s gapped 5 handles lower, opening range 1407.50 – 1408.00  and traded 1409.20, down to 1406.50 and up to the morning high of 1411.00 by 9:20CT. Headlines are back in play, the trade thinned out following headlines of German chancellor Merkel says won’t make decisions in Samaras talks. Lots to sort out banking union, ESM vote, Greece, ECB buying sovereign debt, that’s a lot to fluff up – by kicking the can. Plenty of other headlines followed, but most were not new and had little market effect. Traders were looking at profit taking in financials and crude in the early trade. Crude popped back modestly in the green following the 9:30 EIA data that showed a much larger than expected draw of 5.412 million barrels. The next move was a new low of 1406.20 by 10:03 as the treasuries were threatening new daily highs, 30yr up a full point. EUBIE (10:16:26): SPU 1406.50 / TLT $123.69 Widest ALL DAY / PICK UR POISON. At 10:32 a new low of 1405.50 traded followed by a retest/fail at the opening range and another new low 1404.50 by noon, VIX highs +3.26% @ 15.51. EUBIE (12:15:52): 1405.60 was 8/15 highs / is this it for the downside for now? 3 day lows till bounce? william_blount (12:22:06): ok-we get good reaction and 1415 is doable the last hr and maybe more — bad reaction = 1398-1402.5. 1406 area was trading when the FOMC mins stated mts2 (13:01:41): “Many members judged that add’l monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable (econ) strengthening.” Up, up and…only a double top at the daily high 1411 & retest/hold the opening range – lacking in bullish momo/chop shop… EUBIE (13:15) some THIN CHOWDER (definition http://www.mrtopstep.com/trading-101/ ) stirring 1410 mts2 (13:17:58): XLF seeing 20K blocks in Oct 15′s and Nov 15′s Jimmy_Osbiston (13:18:04): there went the 1.25 EURUSD barrier. Post the FOMC, the spoos hold the 1406 area before trading 1414 by 2:10 – 10ish handles off the low before trading down to 1411 by 2:25 1410.75 area was trading when the closing imbalance showed 25 of 30 DJIA for sale and the broader market showed overall (15:45:36) $ 331.85 M / -874.40 M to sell-side. 1412  traded on the cash close before settling at 1412.30 UNCH’d.

Posted 8-21-12 EUBIE  guess what? TODAY IS A NEGATIVE OUTSIDE DAY / NEW HIGHS 1424.75 TAKING OUT YEST LOWS 1409.70 // MARK UR CHARTS // ‘TREND A CHANGING’

MTS video: http://www.mrtopstep.com/2012/08/8-22-12-brian-shepard-headlines/

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