Monday, September 8, 2014

S&P; Higher Bond Yields Prompt Equity Selling Following Record

The Emini S&P future had made nearly uninterrupted new session highs since Aug 27th.  Since then, there have been 15 new highs, including several record new highs, without a 3 session pause.  Tracking closely the developments over the last week, we have been attentive to the small differentials between the opening and closing prices over an extended period.  Through last Thursday, there was a record low 19 points separating the opening closing differentials when tallied for the 9 consecutive session period.  Since March of 2000 nearly 15 years, there has never been a collection of so many small close differentials.

A small differential between open and close is generally considered an indication of indecision.  My sense has been that the collection of indecisive sessions, in fact a record number, is consistent with a heightened level of overall indecision and this is not constructive to the bullish trend. 

We are all aware of the low level of volatility reading in VIX.  The relatively modest price swings in S&P 500 index in general of late is consistent with those levels.  However, there are some bullish developments in the VIX that may prove instructive and these developments took place despite the series of marginal open/close differentials.  Specifically, there is a bullish window opened from Aug 28th that we believe will act as support for higher volatility. 

Concerning the Emini, the futures price action on Friday may seem to have provided an answer to the question; where will the S&P 500 index go following the current consolidation?   However, even though Friday posted a new record high settlement and the contract had its best open to close advance in 3 weeks, the price action today is soundly rejecting the notion that a bullish break-out has been achieved. 

Instead, today’s price action will apparently create a bearish engulfing of Friday’s advance.  A settle at or below 1989.75 will create a bearish engulfing and position for further losses, possibly leaving bullish minded traders scratching their heads and would be shorts watching rather than participating.  That combined with spiking volatility should give tomorrow a chance for showing some serious profit taking by longs.    

We should note too that the VIX will apparently break above all settles over the last three weeks, setting the stage for a stronger retracement of the decline from early-August high near 18 high.  The bullish window in the VIX index earlier mentioned and additional bullish candlestick patterns since support higher VIX prices over the coming days.    

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