Dow, S&P, NASDAQ And The VIX: Strange Highs And Lows

We wrote yesterday about a trifecta of big worries: funds losing money because no one is trading, the markets being driven by an increasingly small number of stocks, and a fear index that seems stuck in Pollyanna mode. None of which seems to have much connection to the reality of most people’s lives.

Yesterday’s trade was another great example of what MrTopStep calls “thin to win,” a market able to rally because of thin volume. As we said earlier in the week, Memorial Day officially kicked off the summer and this week’s volumes proved that point with the Dow seeing the lightest volume of the year.

The Asian markets closed modestly lower and in Europe 7 out of 12 markets are trading higher. Today economic and earnings schedule starts out with the Personal Income and Outlays, Chicago PMI, Consumer Sentiment, Farm Prices and incoming Cleveland Federal Reserve Bank President Loretta Mester’s speech to a conference on inflation and monetary policy.

In Stanford, California, Richmond Federal Reserve Bank Jeffrey Lacker discusses his recent paper on lenders of last resort (PDF). Also expect Philadelphia Fed President Charles Plosser and San Francisco Fed President John Williams on a panel on monetary policy and earnings from Big Lots (NYSE: BIG), NGL Energy Partners LP NGL, and ANN (Ann Taylor, Loft) ANN.

https://www.youtube.com/watch?v=I8EkBJ4eOBI

Our View

After so many days up we called for selling the rallies. We did so but a decline early in the day led to new contract highs for the Dow (DJI:^DJI), S&P (SNP:^GSPC) and Nasdaq NQM by the close.

I have said many times that the S&P has to sell off before going back up and that’s exactly what happened. As we watched the buy/sell imbalances, we saw that every round of aggressive selling was met by buyers snapping up more contracts at the bid and keeping prices from dropping further. In the end, those bulls got their way.

According to the Stock Traders Almanac the week after the Memorial Day holiday is down, but with such a low level of participation the buyers have taken advantage of the low liquidity.

The S&P futures SPM have closed higher 8 out of the last 10 days or up 6 of the last 7 days with the 1 down day only being down -0.10 handles or 1 tick. Our view: sell the early rally and buy weakness.

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

• In Asia, 10 of 11 markets closed lower : Shanghai Comp. -0.07% , Hang Seng +0.31%, Nikkei -0,34%.
• In Europe, 7 of 12 markets are trading higher : DAX UNCHANGED, FTSE -0.19%
• Morning headline: “S&P futures seen lower ahead of Heavy day of Fed speak ”
• Fair Value: S&P -2.08 , Nasdaq -1.14 , Dow -13.11
• Total volume: 977k ESM and 4.3k SPM traded
• Economic calendar: Personal Income and Outlays, Chicago PMI, Consumer Sentiment, Loretta Mester speaks, Jeffrey Lacker speaks, Farm Prices, Charles Plosser and John Williams speak. Earnings from Big Lots BIG, NGL Energy Partners LP NGL, and ANN (Ann Taylor, Loft) ANN.