Geopolitical concerns continued to weigh on the S&P 500 during Friday’s trade as the index closed out the week with its worst loss since January. Despite the uncertainty, investor sentiment remains positive.
Red October in March
We are going to skip the normal view I do of giving net changes and how many up or down days the S&P (CME) has had or talking about the low volumes due to the rollover or how the S&P rallies off of bad news and sells off on good news—none of that.
Two weeks ago the S&P bounced after Putin pulled back, but last week as the Crimean vote neared the S&P started going down again, accelerating lower on Thursday and the S&P seemed to lack leadership on Friday’s close. Most of the traders we spoke to said they were either flat or short over the weekend. With the exception of being thrown off by decline of January and early February, the S&P has rallied over 8%.
Now it is going back down again, suggesting it may be turning less bullish. Last year we said we were going to stay bullish until something structurally started to change. While we cannot guarantee the S&P is going to go crashing down, we do think there could be unexpected consequences in regard to the sanctions.
US Sanctions
Forget the annexation of Crimea; we never thought Putin was going to leave. But no one knows what the effects will be of a long-term East-West cold war. How will the global economy be affected by tit-for-tat sanctions? As the G7 countries announce a unified stance toward the Russians, what type of retaliatory sanctions—or other action—will Russia take against America and its European allies? While China is a big economic concern, no one really knows what the effects will be when Russia pushes back.
Bus Too Full
On Friday we started quoting up some cheap options to buy. The idea was simple. After the S&P fell 1.97% last week and knowing that everyone was short and that no one wanted to be long over the weekend, we figured buying some cheap calls might be a good way to go.
After a 10-handle drop and a 10-handle rally back, the S&P is now up over 10 handles this morning. This was a MrTopStep Bus Too Full trade. Below is a link to the new MrTopStep E-book where you can learn more about our trading rules.
The Asian major markets closed modestly higher and in Europe 11 out of 12 markets are trading higher. There are no economic releases today, but Philadelphia Fed President Charles Plosser speaks in Paris on monetary policy, banks and protectionism and Chicago Fed President Charles Evans speaks in Columbus, Ga., on the economy and monetary policy. While there are plenty of data points this week, Russia and the two-day Fed meeting will be on the most-watched events list.
Our View
The election was a done deal from the first days the Russian paramilitary showed up on the ground in the Ukraine. There were never going to be any negotiations. In Globex the ESM14 made a low of 1823.50 after the open and was trading 1833.50, up .50 handles at 8:30 pm CT and up over 10 handles at 5:00 am.
With no scheduled economic releases, the news algos will be concentrating on any headlines with the words “Russia” or “Ukraine.” Mondays have not been good for the S&P; out of the 10 Mondays in 2014 the S&P closed lower 6 times (some with heavy losses), up 3 and close 1.
But according to the S&P cash study the Monday of the February expiration week has been up 20 / down 9 of the last 29 occasions. If this works the way it should, the S&P should rally off the bad news today. The question is can it hold? We think so…
- In Asia, 6 of 10 markets closed higher: Shanghai Comp. +0.96%, Hang Seng -0.30%, Nikkei -0.35%
- In Europe 11 out of 12 markets are trading higher: DAX +0.63%, FTSE +0.38%
- Morning headline: “S&P 500 futures seen higher after Crimean vote”
- Total volume: 2.19mil ESM and 37k SPM traded contracts traded
- S&P Fair Value: 1833.23 (futures 8.52 higher at 1841.75 as of 6:04 AM CT)
- Economic calendar: There are no scheduled economic releases today. Philadelphia Federal Reserve Bank President Charles Plosser speaks in Paris on monetary policy, banks and protectionism and Chicago Fed President Charles Evans speaks in Columbus, Ga., on the economy and monetary policy.
- E-mini S&P 5001858.50+0.75 - +0.04%
- Crude98.55-0.22 - -0.22%
- Shanghai Composite0.00N/A - N/A
- Hang Seng21576.98+103.031 - +0.48%
- Nikkei 22514484.55+206.88 - +1.45%
- DAX9180.89+124.479 - +1.37%
- FTSE 1006568.35+40.46 - +0.62%
- Euro1.3929
