Thursday, July 21, 2016

S&P E-mini Gives Warning After 9.5% Advance

Keep a closer eye on the S&P today as it may be offering signs of changed temperament.  The S&P 500 September E-mini future (ESU6) has enjoyed a 9.5% advance from the June 27th low (‘S&P 500 E-mini Could do the Unthinkable...’) when it quickly discounted the bearish implications of the post-UK ‘leave’ vote.  The bullish advance since then may be coming to an end.  Below we will review some of the developments which may support this view.

First, as indicated earlier, the E-mini has advanced 9.5% since the June 27th low.  This is a powerful move, but does not in itself indicate overbought conditions.  By July 14th however, there were 10 new session highs made without a three session pause.  That indicated the bullish advance was somewhat stretched.  Still further new highs were made today and Wednesday, with yesterday’s gains carrying the 14-day RSI to 67, a level not seen since April.  The jury is still out on the new highs made yesterday and today, and if the settlement is below 2159 today, we should be attentive to the bearish implications of that weak (‘bearish engulfing’) finish. 


The VIX has offered many good insights into likely future direction of the S&P (‘Move Along Folks – No Black Swan Here’) and recent VIX price action may do the same.  The VIX index fell from a post-UK ‘leave’ vote high of 26.72 to 11.40 yesterday.  Yesterday’s price action in the VIX was a ‘bullish hammer’ on my candlestick analysis.  There were 11 new session lows without a pause and we see the VIX as being stretched.  Today’s price action appears to be confirming the bullish nature of the ‘bullish hammer’ in VIX and with any settlement near current levels (12.98) would provide strong implications for further VIX gains and weaker overall equity prices.  


Additionally, Investment Grade and High Yield spreads have come crashing in since June 27th with implications that positioning became offside following the UK ‘leave’ vote and more generally that portfolios still had a very strong appetite for yield.  While a ‘risk-on’ sentiment could have followed this development, it was not likely its chief driver.  Some analysts may have over-estimated the bullish aspects of this credit development.   



We note also how gold has performed since early July as the strong June (13%) advance has been curtailed once the post-UK ‘leave’ vote high was again achieved.  Today, there was a risk for the opposite of the aforementioned ESU6 ‘bullish engulfing’ to have happen in Gold which would put a large question mark on golds recent weaker price action.  Still today’s advancing gold prices are in line with a more cautious market and may be giving further signs that the weakness in equity prices are not fleeting.