US stocks made another new high yesterday with the S&P futures [CME:SPM14] adding 6.7 points to 1896.90 or up 0.40% and finishing up 1.2% on the week.
Despite the lethargic pre-holiday trade the S&P futures managed to close higher 4 out of the 5 trading days this week (May 19 +7.6, May 20 -14.2, May 21 +16.8, May 22 +5.3, May 23 +6.7) and cleared the old May 13 record close of 1894.25 to finish at 1897.00. The thin trade definitely added to the rally. Friday’s high of 1899.25 in the E-mini S&P (CME:ESM14) was close enough to 1900 to give us a “Come on, already!” feeling, but not enough to trigger the buy stops that lie above.
Thin to win
We asked longtime floor trader Danny Riley for his thoughts, and he said, “The overall price action in the S&P is not surprising, we knew going into the short week, with better weather across the US, that traders would probably take some time off and that’s exactly what they did.”
But “what made the upside so easy was the volumes; there were none.” Riley said when it’s like this it makes for something traders call, “thin to win.”
Index arbitrage buy programs: the hidden force behind the bull market
Riley, a 37-year veteran of the CBOT and CME trading floor explained that with so few people trading and so many buy stops above, the market tends to drift higher. When that happens and the premium levels between the S&P futures and S&P 500 cash (SNP:^GSPC) are far enough apart, the buy stops actually facilitate “lifting the offer,” creating an index arbitrage buy program.
As I’ve written before, this trade of the difference in premium (or “fair value”) is one of the major drivers of stock market price action, yet you rarely hear about it on CNBC. Said Riley, “The day was a forgone conclusion long before the 8:30 bell rang!”
Most traders we talked to on the floor of the CME Group said they knew the week was going to be slow but could not believe just how low the volumes were throughout the week. The big concern on the floor and at prop desks and funds is how low the volume may get during the summer. Nevertheless, traders and analysts expect the S&P to continue higher.
Riley want on to say that with 490 of the 500 companies in the S&P 500 reporting and 74% posting profits above Wall Street’s forecasts, the S&P should continue to keep doing what it’s doing: pull back a little and make new highs. Riley said he expects the S&P to be trading near 2000 at year’s end.
S&P 2000? Really? Yes
Veteran floor traders like Danny Riley aren’t the only ones predicting a continued bull market into the fall. Analysts looking at fundamentals point to a number of optimistic factors. Unemployment is back down to 2007 levels. After the Fed’s buybacks have been cut by more than half over five tapers, the availability of money and credit hasn’t dried up.
Obamacare has insured 8 million people without the negative effects its critics feared. China, India, and the G20 are settling into a new normal of slower, but steady growth. And the Q2 earnings, with 74% of companies above the mean estimate, are identical to the earnings for 2013’s second quarter.
While a 10% correction is long overdue and by no means out of the question, we also have to deal with a puzzling thought: the economy—if you can put aside terrible inequality, corruption, our refusal to fix our health care system, and our failure to deal with climate change—is actually doing pretty well.
Enough to make the stock market keep going up for a while longer, anyway.