There are a number of important changes taking place in the S&P 500 stock index futures. Normally, we focus on short-term swing trading opportunities. However, when something structural appears to be changing, it’s important to take note. The small speculators who bought the August decline expecting a strong closing quarter are very near to fighting a losing battle. Furthermore when the rapidly declining open interest and currently low volatility are factored in it doesn’t look like the small specs are going to get the strength they’d hoped for.
The domestic stock markets have been looking weaker and weaker as they head into the ultra important Black Friday and holiday shopping season. Tuesday’s weak open as the result of Turkey shooting down a Russian fighter jet is the confirmation needed to issue a sell signal in the Dow Jones Industrial Average (DJIA) futures. The Nasdaq 100, S&P 500 and DJIA are all exhibiting the same pattern but the textbook example lies in the Dow futures.
Every one of the major U.S. stock indices has sold off more than 10% in the last week. This will finally put an end to the, “But the market is due for a 10% correction” argument. I began trading in the S&P 500 pit in the early 1990’s. Therefore, it has been my experience that I can make more money on the long side of the equities, more often than I can hoping to catch the major downdraft. The S&P 500, the broadest and biggest of the indices knocked out a year’s worth of gains in three days. Now that we’ve gotten the drop, let’s see what we can buy.
It sure seems like everything in the news has been full of alarm bells lately due to Greece, China and falling oil prices in one form or another. Frankly, China’s impact on the US equity markets may be just the buying opportunity we’re looking for as several factors combine to point towards strength through the expiration of the September Dow Jones futures contract on September 18th.
We’ve discussed the peculiarities of the stock index futures’ expiration cycle in detail here before.
Commercial traders in the stock index futures behave quite differently than the Index traders or, small speculators who act as their counterparts. Collectively, this is perfectly logical. Index traders are positive feedback traders. Positive feedback traders add on to their bullish positions as the market climbs and scale out of their bullish positions as the market declines. This keeps their portfolio balanced to their available cash resources. This also places them on the side most likely to buy the highs and sell the lows. Typical trend following. Small speculators are a sentiment wild card. Their position is more price and sentiment based than anything else. The randomness of their sentiment makes their positions too yielding to lean on.