Stocks First Down Day In 10, Overall Outlook Still Bullish

The S&P closed 6.50 handles lower in E-mini futures contract (CME:ESM14) yesterday, sold off down to 1940.50 and chopped between the 1942-1943 level for the first three hours of the day.

The gap down had all the looks of a further decline, but like many days over the last two months the selloff led to a bounce. After the bounce the ESM14 went “dead quiet,” as some traders put it. After chopping around in the afternoon and touching the day’s low of 1938.50, the premiums widened out and in came a small index arb buy program which pushed the ESM14 back above the 1944 level late in the day, just one tick shy of the opening range high.

While the overall tone of the markets may not have changed very much, yesterday’s selloff was the first time in over two weeks that we saw some significant sell programs and sell stops. What can you say except, it was about time?

Think Ahead

Over the last few days I have talked about buying cheap S&P puts. There are other strategies, like bear put spreads and selling naked calls above the market, but as we explained in yesterday’s view, this is what we call an option lottery ticket. With a cheap out-of-the-money put, if the S&P continues higher you will not lose a lot.

That was our suggestion, but then I saw the June S&P cash expiration study, which looks very bullish. Buying puts is still a good strategy in the longer term, but bullish stats combined with low volumes could make for a rally that’s hard to fight. We’re looking to bid low and wait to get as high a strike price as possible and we are also looking further out in time, beyond the July expiration on the September underlying futures.

As you can see below, in the period from this Friday to next, every day is up except next Wednesday.  While I do not recommend the study as your sole reason to buy or sell, these stats are big. You rarely find such odds and if nothing else, it should make short sellers cautious.

PitBull’s Thursday/Friday low

Yes, the S&P (CME:SPM14) bounced late in the day, but when you take out yesterday’s Globex volumes and the spreads (mostly from the June to September rollover), overall volume was low again.

When you look at the next few weeks it’s hard to find the negatives. With fewer people trading, the summer starting, the June Quad Witch and the June end of the quarter rebalance, it may be hard to be a seller. As we go into the end of the week we are back to looking at the PitBull’s Thursday / Friday low before the expiration, and our S&P cash study backs that idea.

The Asian markets closed modestly lower and in Europe 8 of 12 markets are trading modestly higher. Today’s economic and earning schedule starts with jobless claims, retail sales, import and export prices, business inventories, EIA natural gas report, 30-year bond auction, Fed balance sheet, money supply and earnings from Finisar (NASDAQ: FNSR) and Lululemon  (NASDAQ: LULU).

#CYRUS : In one corner, we have Pitbull’s Thurs/Fri before OpEx week low … and in the opposite corner, Pitbull’s mid-month bulge … wondering what a survey would say …

Our View

Let’s face it: You have to make what you can. While the VIX is flashing warning lights it’s possible the VIX keeps going down and the S&P keeps going up. Some signals we used to use don’t work now. Whenever there is a consensus the markets go the other way. Nothing stays the same.

Our view is not to go overboard with the downside puts, there are just too many bullish scenarios in the next 2 weeks. As for today, we lean to selling the early rallies and buying weakness. Thin to win is in and with the rollover starting today there will be even less volume in the outrights as traders focus on the roll.

In Asia, 8 of 11 markets closed lower: Shanghai Comp. -0.16%, Hang Seng -0.35%, Nikkei -0.64%. In Europe, 8 of 12 markets are trading higher: DAX +0.07%, FTSE +0.13% Morning headline: “S&P 500 futures seen higher ahead of US retail sales” Fair value: S&P -9.08 , NASDAQ -9.82, Dow Jones 87.72 Total volume: 1.67 MIL ESM and 41.4 K SPM traded (mostly spreads) Economic calendar: Jobless claims, retail sales, import and export prices, business inventories, EIA natural gas report, 30-year bond auction, Fed balance sheet, money supply and earnings from Finisar (NASDAQ: FNSR) and Lululemon  (NASDAQ: LULU). E-mini S&P 5001940.25-3.75 - -0.19% Crude102.15+0.02 - +0.02% Shanghai Composite0.00N/A - N/A Hang Seng23175.02-82.27 - -0.35% Nikkei 22514973.53-95.95 - -0.64% DAX9938.12-11.689 - -0.12% FTSE 1006846.67+7.80 - +0.11% Euro1.3541

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: Futures Markets

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