Stock Prices Moving Like Water In Bathtub

The S&P futures [CME:SPM14] closed out the week up 1.3 handles. After making new all-time contract highs the S&P fell into one of our favorite rules called “The Bus Too Full.” It is the most basic of trading rules but it remained true to its meaning.

I want to clarify something; I am not sour grapes over what going on in the markets with algorithmic and program trading. I think it’s wrong that people who don’t actually “trade” for a living get to take advantage of the markets and our money. But you’re not going to see me out picketing.

In the old days people didn’t go to jail for front-running but they are now and I just wonder when the algo boys will be brought up on charges. Over the weekend Michael Steinberg, another trader from Steve Cohen’s SAC, was sent off to jail for three and a half years. Mad? Sour grapes? No, I would have to compare it to a plumber who doesn’t like the smell of the sewer. He has to live with it and so do I.

PitBull’s Water in the Bathtub

One of the best ways to describe the S&P 500’s overall movement is the PitBull’s “water in the bathtub” analogy. To see that overall pattern, you have to look at the Friday-to-Friday overall net change in the E-mini S&P futures ESM.

On Friday April 25th the ESM14 closed at 1860.10. On Friday May 2 the ESM14 closed at 1874.50, down -3.25 handles, Friday May 9 the ESM14 closed at 1873.50, up +1.25 handles and last Friday, May 16 the ESM14 closed at 1874.75, up +7.50 handles.

This may not seem like a big deal but after all the big ups and down and thrashing in the S&P futures over the last three weeks the S&P is unchanged. As the Federal Reserve goes into its 5th taper the bonds have rallied sharply and the S&P remains less than 1% below its all time contract high. As the PitBull says … its all water in the bathtub, just swishing back and forth.

The Asian markets closed mostly lower and in Europe 8 out of 12 markets are trading lower. This week’s economic calendar is one of the lightest in many weeks: only 11 economic releases, 10 T-bill or T-bond or auctions announcements, the FOMC Minutes, and Janet Yellen and 5 Fed Governors speaking. Today’s economic calendar starts with with no economic release, a 3- and 6-month T-bill auction and Dallas Fed President Richard Fisher and San Francisco Fed President John Williams on panel discussing the role of the Federal Reserve, in Dallas and earnings from Campbell Soup Company (NYSE: CPB), Urban Outfitters (NASDAQ: URBN), and Valspar Corporation (NYSE: VAL).

Our View

I am never going to be as good as you when it comes to building and reading charts. That’s not what the PitBull depends on me for, nor should you. I am the market feel guy. I follow patterns, fair value, or the difference between the ES and the S&P 500 cash, volume imbalances and stats.

The reason I think stats are so important now is that the algos take into account just about every facet of how we follow and trade the markets and historical stats are definitely part of it. Below are a few basic but fairly import stats for today.

1. The last 5 Mondays have been up
2. The Monday after the May expiration has been up 16 / down 14 of the last 30
3. Mondays are the lowest volume day of the week
4. Thin to Win plays a big role in moving the ES under low-volume conditions

Conclusion: We all know what happens after the S&P sells off and starts to bounce. Friday’s Late Day Rip has reappeared over the last few weeks and with Monday up 5 out of the last 5 we think it’s going to end up 6 in a row.

Buy the breaks. As the PitBull says: The S&P rallies early in the day and early in the week. 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, 6 of 11 markets closed lower : Shanghai Comp. +1.05% , Hang Seng -0.04%, Nikkei -0.64%.
• In Europe, 7 of 12 markets are trading lower : DAX -0.39%, FTSE -0.40%
• Morning headline: “S&P futures seen lower as AstraZeneca rejects Pfizer’s final proposal”
• Fair Value: S&P -3.11 , Nasdaq -2.53 , Dow -32.27
• Total volume: 1.52ESM and 5.5k SPM traded
• Economic calendar: There are no scheduled economic releases, Dallas Fed President Richard Fisher speaks. Earnings from Campbell Soup Company CPB, Urban Outfitters URBN, and Valspar Corporation VAL.