Off the cuff comments made by the President-elect yesterday regarding US drug companies and a realization that higher trending interest rates (despite the recent recovery) is hurting the housing market, soured the equity market rally. As is usually the case, the market wasn’t reacting to changes in fundamentals but rather expectations of changes in fundamentals. Accordingly, as we go on traders will either retract their initial reactions to these events or add to them. At the moment we are merely seeing back and fill trade as expectations are tempered. Today’s trade wasn’t a victory for the bears or a defeat of the bulls, it was simple consolidation.
The economic docket for tomorrow is busy, but we doubt the market will be paying attention to the second-tier reports (PPI, Retail Sales, and Michigan Sentiment). The fireworks will likely be next week with the Presidential inauguration (who knows what types of market-moving comments could be made on both sides of the isle).
Treasury Futures Markets
The ZB rally isn’t stopping to take a breath
Although this week’s economic news doesn’t hold any game-changing information, there has been plenty of “Fed-speak” to keep things interesting.
St. Louis Fed President Bullard, who is a member but not a voter, stated he believed the Fed could be patient on inflation. He doesn’t believe fiscal changes will have much of an impact until 2018. He also noted the interest rate markets could be getting ahead of themselves. He is predicting a single rate hike in 2017. This differs from the committee’s expectations for three. In fact, both Philadelphia and Chicago Fed Presidents came out today in favor of three 2017 hikes (both are voting members). The reality is probably somewhere in the middle (two).
According to current pricing in the Fed Funds futures, the market is attaching a 50% chance of a Fed quarter-point rate hike by the June meeting. We think the market is over-pricing the odds of such a hike occurring in that time frame. If we are correct, the path of least resistance in interest rate products should remain higher for now (yields lower).
Treasury Futures Market Analysis
**Bond Futures Market Consensus:** The path of least resistance is higher, but indicators are slowly moving into overbought territory.
**Technical Support:** ZB : 150’08, 146’28 and 154’01 ZN: 123’23, 122’20 and 122’07
**Technical Resistance:** ZB: 154’10, and 157’18 ZN: 125’21, and 127’28
Stock Index Futures Markets
Dip buyers come to the rescue in mid-day trade
It is clear that the massive piles of cash that have been sitting on the sidelines are finally being put to work on even the smallest dips in the S&P 500. However, with so many people desperate to get long the market near all-time highs, we can’t help but be cautious. For instance, we’ve read numerous articles in which equity managers are suggesting investors that haven’t touched the stock market since 2009 are finally starting to dip their toes into the water.
We aren’t saying 2016 will be remembered as the top of the market in the same way 2009 is remembered as the bottom, but being bullish stocks at the same time as a group of investors that cashed out their portfolios on the 2009 lows doesn’t feel right.
**From the last newsletter but still in play:**
The Presidential inauguration is scheduled for late next week and earnings season begins the week after, yet this week poses little event risk. Accordingly, investors are comfortable in their positions and volatility and volume are at depressed levels. In the meantime, it might be difficult for prices to make much headway in either direction.
We haven’t changed our stance. We think a near-term high is looming, but we can’t rule out a quick probe to 2295. Thus, we are holding long ES puts and will be willing to sell calls on a spike higher.
Stock Index Futures Market Ideas
e-mini S&P Futures Market Consensus
We are short-term bearish, but chasing prices lower doesn’t work. Look to buy puts or sell calls on large upswings.
***We are now charting the March contract!**
**Technical Support:** 2247, 2212 and 2159
**Technical Resistance:** 2276, 2286 and 2294
e-mini S&P Futures Day Trading Ideas
**These are counter-trend entry ideas, the more distant the level the more reliable but the less likely to get filled**
ES Day Trade Sell Levels: 2273, 2285, and 2295
ES Day Trade Buy Levels: 2248, 2238, and 2229
In other commodity futures and options markets….
June 23 – Go long corn futures near 392 using mini contracts (the beginning of a scale trade). Full-sized contracts can be used if available margin and risk tolerance is appropriate.
June 30 – Buy September mini (or full-sized) wheat near $4.47.
July 5 – Add to the long mini corn (or full sized) near $3.45.
July 14 – Sell the corn add-on near 370 to lock in a profit (hold the original entry).
July 29 – Buy mini corn future near $3.33 to average entry cost lower.
July 29 – Buy mini wheat to add to our long and adjust the average position entry to $4.25ish.
August 18 – Sell half of the mini wheat position to lock in a profit of about 20 cents on the add-on contract. We’ll hold the original position in hopes of a continued upswing.
October 6 – Buy March Euro strangles using the 123 calls and the 100 puts for about $400. This trade is looking for a sharp increase in volatility.
October 27 – Liquidate half of the corn position, which was added near $3.33 to lock in a profit of about 20 cents.
November 14 – Sell March Euro 100 put for about 41 ticks to lock in $250 to $300 per contract. We are still holding the long call half of the strangle, which is under water.
December 8 – Sell the January S&P 2290 call for about 10.00.
December 13 – Sell the January S&P 2330 call for about 10.00.
December 16 – Buy back the January S&P 2330 calls for about 4.00 to lock in a quick profit.
January 3 – Buy back January S&P 2290 calls to lock in a profit of about $300 per lot before transaction costs.
January 6 – Buy March ES 2025 puts for about 7.50 in premium ($375).
(Our clients receive short option trading ideas in other markets such as gold, crude oil, corn, soybeans, Euro, Yen, and more. Email us for more information)
**There is substantial risk of loss in trading futures and options.** These recommendations are a solicitation for entering into derivatives transactions. All known news and events have already been factored into the price of the underlying derivatives discussed. From time to time persons affiliated with Zaner, or its associated companies, may have positions in recommended and other derivatives. Past performance is not indicative of future results. The information and data in this report were obtained from sources considered reliable. Their accuracy or completeness is not guaranteed. Any decision to purchase or sell as a result of the opinions expressed in this report will be the full responsibility of the person authorizing such transaction. Seasonal tendencies are a composite of some of the more consistent commodity futures seasonals that have occurred over the past 15 or more years. There are usually underlying, fundamental circumstances that occur annually that tend to cause the futures markets to react in a similar directional manner during a certain calendar year. While seasonal trends may potentially impact supply and demand in certain commodities, seasonal aspects of supply and demand have been factored into futures & options market pricing. Even if a seasonal tendency occurs in the future, it may not result in a profitable transaction as fees and the timing of the entry and liquidation may impact on the results. No representation is being made that any account has in the past, or will in the future, achieve profits using these recommendations. No representation is being made that price patterns will recur in the future.