Futures 101 and what to look for in the Opening Print and the Daily Futures Recap Video:
With so many things going wrong around the world and in the U.S., how is it possible that the S&P 500 futures are going up? After President Obama's re-election and the subsequent selloff, the markets could not have looked worse. Adding to their woes is the lack of compromise on both sides of the aisle concerning the fiscal cliff. So with so much uncertainty, why is the S&P going up?
Here are some reasons:
Best six months for stocks (November to April): According to the Trader's Almanac, the best period for buying stocks starts in November and lasts through April. For many years we have seen the markets firm up after letdowns in September and October. According to the Trader's Almanac, November to April are the top gaining months for the S&P dating back to 1950. The S&P 500 has gained 1332.94 points over the last 61 years compared to 12.60 points in the worst six months for stocks.
End-of-year repositioning: December is one of the biggest months of the year for marking stocks up. What happens is portfolio managers tend to sell out losing positions for tax purposes and add to winning stock positions.
PPT (Plunge Protection Team): The Fed monetizing $3 trillion in debt has been one of the biggest supporters of the stock market. While the market reacts to negative news, the constant support from the Federal Reserve has been a key driver in supporting the stock market.
Santa Claus rally: For many years there has tended to be something called the year-end push or year-end markup. While many think the Santa Claus rally starts in the beginning or middle of December, the actual Santa Claus rally is a phenomenon that takes place the last 5 days of the year and the first two trading days of January. That is when traders find out if Santa is going to visit Wall Street or not.
January effect: While the big boys are buying the big-cap stocks at the end of October and pushing them higher into the end of the year, the smaller players are looking for something known as the January Effect. Selling in December for tax reasons and buying again in January historically has been most noticeable in small caps, but in recent years buying small caps after the big caps have been bought and sold has not worked as well because the markets have adjusted to it.
Fighting the S&P in December: Another reason for the markets going up is that traders are selling when they should be buying. Instead of being buyers, they fight the trend. As the markets sell off, traders position themselves short, and when the markets go up they not only buy to get out but buy to get back in.
At the end of the day, every selloff this year has been bought. After the big up move in the first quarter of 2012 the S&P sold off to nearly unchanged and rallied again. The overall price action has been to sell off, back and fill and then rally. The current selloff and rally match all the other selloffs all year. If you want to play the year-end markup, you have to start looking for a low around the time of the December triple witching Friday before Christmas and capitalize on the Santa Claus rally and the January effect.
Our view: The SPZ has been up five days in a row for a total gain of 36 handles. Last night there was another round of headlines saying the government is working on a deal to avert the fiscal cliff. While the markets are going up you always have to be on guard for some type of negative headline. The SPZ is entering a big area of resistance at the 1433-1435 area and may be in need of some type of selloff to start back and filling before it starts going back up again. We lean to selling the early rallies and buying weakness.
As always, use stops and keep an eye on the 10-handle rule. Don't forget to catch MrTopStep on The Closing Print video found under the OptionsTV page (top bar). We report directly from the SPX pits, wrapping up the day and positioning for trade tomorrow.