Dow, S&P New All-Time Highs; Friday's Dip And Monday's Rip

Yesterday the U.S. indices all closed sharply higher; the Dow Jones Industrial Average [DJI:^DJI] and the S&P 500 [SNP:^GSPC] traded into new all-time contract highs. The Nasdaq Composite added 72 points or +1.8%, the Russell 2000 gained 26 points or +2.4%, the VIX closed down -0.69 or -5.34%.

An algorithmic world

There are not that many strategies that work consistently when it comes to trading the markets. Warren Buffett’s “buy and hold” has worked well over the years, but the 2007 credit crisis and shakeout has left many investors at the gate. If there is a noticeable pattern you may be able to catch it, but once the public knows about it, the algorithmic programs are not far behind. Once that happens it’s game over for the pattern and your trade.

In today’s high-flying electronic trading, investors must be willing to jump in when everyone is selling. It’s hard to do but it’s the only way to make money in these markets. The Fed quantitative easing and zero rates have made stocks “the only place to go.”

Friday’s low and Monday’s rip

It’s important to find trading rules that fit both your personality and your trading toolbox. Overloading that toolbox can be just as bad as not having enough tools. While we fully understand that algorithmic and program trading control the wheel, we also know having proper trading rules matched up with knowing your risk can be a bonus for your trading account.

One of the things that makes trading so hard is that the markets tend to send out negative signals when the S&P SPM sells off. With the markets up so much over the last several years, the bears are willing to sell every decline as if it’s the start of a crash. But the reality is, the selloffs are all part of a reload process.

With volumes so low, the selloffs create “thrust.” That is why even when the S&P is going up it has to sell off first — essentially using the shorts and stops as a catapult to the upside. The cash is layered in, not used up all at once. In other words, they are buying while the markets are fluctuating up or down.

Once the sell program dries up, the premiums widen out and the buy stops help lift the E-mini S&P ESM “offers” that make up the index arbitrage buy program. It is an electronic musical chairs game if you get caught on the wrong side. Last week the NASDAQ comp. closed down -2.5%. The Russell 2000 fell 23 points. Despite that weakness the S&P came to life with a late Friday rip to help complete the Pit Bull’s Thursday / Friday low.

The MrTopStep Trading Rules have been battle-tested for years. They are not something that just fell off the shelf. They are real and they work.

Overnight, the Asian markets closed modestly higher (Nikkei +1.95%) and Europe is mixed. Today’s economic schedule starts with Atlanta Fed President Dennis Lockhart speech on the economic outlook, in Riyadh, Saudi Arabia, NFIB small business optimism index, retail sales, import-export prices, Redbook, business inventories, Richmond Fed’s Jeffrey Lacker welcoming remarks at credit markets symposium in Charlotte, N.C., and earnings from CST Brands CST, URS Corporation URS and Fossil (NASDAQ: FOSL).

Thin to win

Let’s stick to the facts: The S&P gained 19 handles and the Nasdaq closed up 60 points yesterday. With the exception of a few small selloffs the ESM14 was constantly trading at buy program levels all day. The ESM14 has closed higher 3 out of the last 4 days for a total gain of 38.4 handles. Our view is that after such a big day up and the S&P being up 3 out of the last 4 session and up 38.4 handles over that period, we could see some type of sideways to lower trade. That does not mean the S&P can’t trade 1900.00 or higher; it means we do not think today will be as firm as yesterday’s trade. Turnaround Tuesday has been up 15 out of the last 18 Tuesdays. You can take it from there.

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

• In Asia, 9 of 11 markets closed higher: Shanghai Comp. -0.10%, Hang Seng +0.41%, Nikkei +1.95%.
• In Europe, 6 of 12 markets are trading higher: DAX +0.63%, FTSE +-.16%
• Morning headline: “S&P 1900 on tap”
• Fair value: S&P -3.81, Nasdaq -2.44 , Dow -44.27
• Total volume: LOW 1.18 mil ESM and 1.9K SPM traded
• Economic and earnings calendar: Dennis Lockhart speaks, NFIB small business optimism index, retail sales, import-export prices, Redbook, business inventories, Jeffrey Lacker speaks. Earnings from CST Brands CST, URS Corp. URS, Fossil FOSL.