Monday, April 20, 2015

S&P Recovers from Friday Jitters-Treasuries too Lofty?

On Friday, ESM5 (June Emini S&P) completed a bearish reversal pattern that suggested the indecisiveness of late would result in a more pronounced decline in equity prices.  Following the 4.5%, two-session DAX dive on the back of heightened Greece default concern, the S&P put in its worst performance since late March on Friday.   

Because the reverse on Friday happened near the record high of late-February and following a similar attempt and failure at that high in March, the prospects were read by some as particularly daunting.  With added concerns for unwelcomed news about the Greece situation coming over the weekend, given the limited scope for immediately adjusting positions, some market longs chose a viewing from the sideline over direct participation.  Those sidelined longs now appear anxious to regain their prior status. 

Technically speaking, should today’s roughly 20 point gain hold, price action clearly discounts the bearish implications of Friday’s decline and scores it more as ‘jumpy investor sentiment’.  It should be noted that the 20 points recovered today, is more than enough to discount the bearish implications of last Friday’s turn and a settle above 2088.375 at any point by Wednesday would do the same, though less dramatically. 

For guide, some additional difficulties plowing through earlier resistance in the last week is not a surprise.  Though a dramatic recovery from a seemingly strong reverse is quite impressive and if held today, should translate into a successful record high in short order.

The implications for a bullish equity response, or possibly better said, the sentiment required to generate such an expected move as just noted would further suggest a less buoyant U.S. Treasury and Eurodollar futures market.  We have been impressed, if surprised by the continued strength there and would account for it because of an extended absence of data which we still suspect is forthcoming and will tell of a recovering consumer spending, more energetic production and recovering housing markets. 

Should this be seen, as is expected, there are a number of Eurodollar calendar spread that are arguably much too tight for future conditions and perceived Fed policy path.      


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