Is the year over for the S&P 500?

By Danny Riley

S&P 500 Volume (1990-2013)

Mondays never used to be as slow as they were yesterday in the E-mini S&P 500  (ESZ13:CME). If you’re asking why, the answer is simple. There are just not as many people trading as there used to be. The first to feel the big pinch are the clearing firms. Below that are the sub-firms, which for the most part have disappeared from the floor, then the IBs (introducing brokers). I heard from the head of a well-known clearing firm that they are opening futures and option accounts at the slowest rate in 35 years.

While we have a fairly busy economic schedule this week, the big show doesn’t come until Friday’s jobs number, which is expecting 120,000 non-farm payroll.

MrTopStep is looking for an even lower number than that. After all the data got whacked out of line during the government shutdown, we see no reason why the jobs number should come in anything but “lower than expected.” The main question is will the whole week be slow? It’s our guess it will be.

A very good friend of ours and the guy who used to run the Goldman Sachs prop desk sent us this yesterday. The funny part is, this is what I have been thinking for the last few weeks. With the earnings almost out of the way and the Fed unable to taper, is the year over already?

Market update – Is the year over? That is the question many seem to be asking this morning as the earnings season winds down and major policy actions (monetary and political) get pushed into next year (for the most part – the ECB prob. pull the lever before year-end). The issuance calendar will stay busy (esp. this week) but that will calm too as of the week of 11/18. Eco data measuring growth so far is surprising to the upside for Oct (the JPM Global Manufacturing PMI hit the highest level since early ’11 in Oct and is signaling 4% global IP growth http://goo.gl/WGphHL) although inflation readings are decelerating, giving CBs reason to stay on hold or (in the case of the ECB) contemplate incremental easing actions. The broad debate remains the same – how much further can stocks run into year-end? With the ’14 SPX est of low $120s remaining unchanged through the Q3 season, we are now in a world of multiples (what is the “appropriate” multiple? 14x? 15x? 16x?). For Mon specifically there isn’t a whole lot to say although it remains the case that people are trying to rotate into underperforming groups, a trend that is favoring retail today. 10yr yields are falling a bit today (in part as Bullard this morning on CNBC backed off a little bit from his somewhat hawkish remarks made last week) but are still around ~2.6%. Flows are very quiet today (after a brief flurry at the open, things have slowed a lot and will likely stay subdued into the afternoon). HFs are dominating most of the activity.

As far as the calendar this week is concerned, it will be quiet until Thurs (ECB meeting) and Fri (jobs report).

US Trading: US equities are grinding sideways as the market continues to feel “tired” while most investors think “equities will go higher in the longer term but in the near term we could see a pullback”. As a result of current sentiment, we continue to see some of the YTD winners underperform (Media, Regional banks, Semis) while investors rotate into YTD laggards (Homebuilders, Steel, Energy). The bulk of media earnings will be released this week, which is causing some investors to take pare positions as they lock in profits ahead of results. Regional Banks are trading lower while Homebuilders (also getting help from RLGY) outperform on the back of Bullard’s comments that “we don’t have to be in a hurry to taper”. Transports are being led higher by Airlines on the back of continued progress being reported regarding the LCC/AAMRQ merger. Retail stocks are trading better than the S5RETL index suggests, as traditional retailers rally while ecommerce stocks (AMZN, EBAY, and EXPE) weigh on performance. Looking at technical analysis the SPX looks like its starting to run out of steam – next support levels are 1730 and 1700.

Our view

This is scary; you take the 145k E-mini S&P 500 Dec 13 (ESZ13:CME) contracts traded in Globex out of yesterday’s 1 million ESZ and the total drops down to only 850,000. When you take out 50% (that’s being nice) for algorithmic and program trading, the total looks even worse: 425,000. This morning we have a few numbers to get past and some Fed speak. Most traders we talk to still think the S&P is in some type of pullback/correction phase, but the S&P never goes down that hard. The largest pullback over the last 9 days is only -7.6 handles. Our view is to buy the early weakness and sell the rally. We think it’s possible the S&P gets weaker as we get closer to Friday’s jobs number.