Have you ever heard of the “Walk Away Trade”? Well, if you haven’t you saw it yesterday.
From The Trading Rules ebook:
The Walkaway TradeThis is an end of the quarter trade. On the last day of the quarter, the portfolio managers have a tendency to run out of money after marking up stocks earlier.
So, by 12:00-1:00ish CST the S&P is susceptible to a decline through the afternoon. Traders look to set up a short position in the early to mid afternoon, as the professional money managers walk away, leaving the equities ready for an afternoon fade.
I’ve said for a long time that the S&P 500 never does what everyone wants it to do when they want it. Yesterday, instead of marking up stock the mutual funds sold. Weakness in Asia (Nikkei -1.6%) and Europe set the early tone. The European STOXX 600 index lost -0.9%. After a few failed rally attempts the S&P futures (ESH15:CME) sold off and closed down 9 points.
Sure, uneasiness over the political turmoil in Greece may have helped stocks lower, but the real reason the stock market sold off yesterday is that the mutual funds have nothing left to buy. The Dow Jones Industrial Average (^DJI:DJI) closed down 55.16 points or 0.3%, just 17 points away from Dow 18,000. The S&P cash index (^GSPC:SNP) closed down 10.22 points or 0.5%. As of yesterday’s close the S&P is up 12.6% and the Dow is up 8.5% for the year. Both markets are set to make their sixth straight year of gains.
I believe that this year’s gains were backed by solid economic numbers and better-than-expected earnings, with the Federal Reserve’s zero borrowing cost policies fueling the way. It is MrTopStep’s position that if stocks continue to report better-than-expected earnings there should be no reason that the S&P will not move higher at least in the beginning of 2015. While many of the big institutions are concerned about the developments in Greece, we think that, like the crude oil scare, this will be smoothed over eventually.
The overall volume was again lower than average. While the overall tone was somewhat negative, we also think that this is just mutual funds taking profits at year-end. Today all the major exchanges close early for the New Year’s holiday. Most markets in the CME group will be closed at 12 o’clock Central time and the S&P closes at 12:15. The markets are open for a full day on Friday, but we think participation will be extremely low.
We are going to close out 2014 by saying that we don’t believe the rally is over. We don’t doubt that there could be some kind of pullback in January, but we think the rally will resume. How high can the S&P go in 2015? Before we jump in and start calling prices out, we have to get past the last three hours 45 minutes of 2014.
Seven of 11 Asian markets closed down and in Europe 7 of 12 markets are trading lower this morning. Today’s economic calendar includes the MBA purchase applications, jobless claims, Chicago PMI and EIA petroleum and Natural Gas reports.
Our view: The shortest day of the week is the one that has the most economic reports. What’s it all mean? Probably not very much when you consider that the markets will only be open for half a day. Our view is to take it easy and not lose any money on the last day of the year.