futures trading newsletter

DeCarley Trading brokerage clients enjoy two newsletters written by futures broker, Carley Garner,  Both the DeCarley Perspective and the Financial Futures Report offer readers specific trading recommendations using option trading strategies (commodity option selling), long and short futures contracts, and option spreading techniques.  

  • the financial futures report

    Event risk is looming in the financial markets.

    On a scale of 1 to 10 this week's calendar event risk is a 12. We will be hearing about home data, employment data, manufacturing data, and sentiment data all while attempting to digest a mid-week Fed meeting (did I mention the State of the Union Address?). Economic data has been consistently strong; it doesn't make sense to expect otherwise. Yet, the financial markets have reacted to both good and bad data in the same manner (buy stocks, sell bonds, sell the dollar, etc.). If there is anything that could change that pattern, it would be a good old-fashioned price squeeze. Big events such as Fed meetings and payroll reports are often the catalyst for such last hurrah trend extensions followed by eventual reversals. This week feels like it is setting up to be one of those times.

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    Where did the ES futures volume go?

    At the time this newsletter was being written, volume in the December e-mini S&P was creeping up on the one million mark in contracts traded. This is dramatically lower than the 1.5 to 2.0 million we were starting to get used over the last three or four weeks of trading.

    Our theory is that many of the highly leveraged market participants have moved to the sidelines after a rough period of trading. Don't forget, bear markets lure traders to the futures markets like flies on "fertilizer". This is because most speculators believe there is quicker, and bigger, profits to be made during sell-offs than can be made during a bull market phase. Their assumption is true, but it also comes with elevated risks.

    The big sell-offs in August and September brought traders to the markets, but the October rally has likely chased them back into hiding (particularly the massive short squeeze seen on Thursday and Friday of last week).

    What does this mean going forward? Two things stick out in our minds; first, the e-mini S&P 500 bears will think twice about selling into a market that has burned them (twice). Second, if these traders stay sidelined and volume remains light, the path of least resistance will continue to be higher in the stock market (light volume tends to see melt-up type of trade).

  • the financial futures report

    Trading volume was muted ahead of the Fed announcement

    Pending home sales were a bullish surprise this morning. According to stats, homes under contract for sale were up 1.4% in March. However, it was the crude oil inventory report that garnered the largest reaction...at least until traders remember it was an FOMC day, and stock prices reverted right back to where they started. The S&P fell markedly following a $1.00 drop in crude oil futures at the hands of the latest weekly inventory report, but both oil and the S&P recovered later in the day.

    Naturally, the story of the day was the Fed. The Fed didn't change interest rate policy, as was widely expected. They also basically copy and pasted their policy statement from the last meeting. In short, today's FOMC meeting was a non-event.

  • the financial futures report

    As most futures traders expected, the Federal Reserve didn't take action

    Going into today's FOMC meeting conclusion, the Fed Funds futures markets were assigning a 15% probability of a rate hike. As it turns out, the majority of traders were correct in assuming the Fed would bypass the September meeting. In our view, we probably won't see any action until December but of course, the November meeting is still up in the air.

    We recently took part in a survey conducted by FXStreet.com in which we found the results to be rather interesting. According to the survey, expectations of the rate hike campaign are rather meager. The consensus average of those polled is calling for the rate hike cycle to stop at about 1.5%. Some were even predicting the Fed would stop at .75% (only one more rate hike from the current level). Also interesting, almost 60% of those polled believe quantitative easing is a tool the Fed will continue to use in the mid-to-long term.

    If you are interested in seeing the details of the survey, click here: (http://www.fxstreet.com/analysis/fxsurvey-dovish-fed-to-hike-interest-rates-in-december-qe-might-return-in-the-mid-term-201609201150)

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    Holiday futures markets are around the corner

    Perhaps the most valuable lesson I've learned in my decade (plus) time as a commodity broker is that holiday markets are not to be reckoned with. Volume is light and trading desks are filled with the second, and third, string staff. As a result, the markets can make dramatic and uncharacteristic moves. An example of this that still stings, is last year's Thanksgiving day crude oil futures collapse. The market was technically closed for the holiday, but the CME decided to let futures trade for an abbreviated session on the morning of Thanksgiving day. As a result of the light volume, and an ill-timed OPEC meeting, crude oil fell roughly $7.00 in single clip. In a nutshell, this is the time of year to keep trading light.

    In regards to the S&P and Treasuries, the holidays have an interesting influence on trade. Nearly every year (I'm not exaggerating), we see an end of the year melt-up. It is often a very slow moving grind, but it eventually adds up to a significant move.

    More pertinent to the current market; the week of Thanksgiving is statistically highly bullish. In fact, the Stock Trader's Almanac suggests that it might be a good idea to look for weakness prior to Thanksgiving to enter bullish trades, and strength after the holiday to exit. In fact, in the Dow, netting the day before and after Thanksgiving day has combined for only 13 losses in 62 years.

  • The Fed is as hawkish as they've been in years...

    A hotter than expected inflation reading and more confirmation from the Fed that they will be seeking at least three rate hikes this year set a negative tone for Treasuries. However, the same news was seen by stock trader as a sign of economic growth and prosperity. Accordingly, the seemingly never-ending stock market rally logged another session of buying. What can we say? This is a bull market...and nothing can derail it. In recent weeks we've seen chaos in Washington, riots in the streets of our cities, a North Korean missile headed for our shores, but we've yet to see investors interested in taking profits in the equity markets.

    If you ask me, the bulls are starting to get greedy (that said, we've obviously been wrong about the strength of this rally). According to our friends at Consensus, their bullish sentiment index has reached 76%. Generally speaking, this signifies an extreme that often results in a reversal. Likewise, The AAII Index suggests only 25% of those polled were bearish the market. The bus could be getting full...and we all know that that means.

     

  • Stock Index Futures Trading Newsletter

    The futures markets have voted: Did Donald Trump awaken the bull market in stocks?

    It is no surprise the markets are fickle. Wall Street appeared to favor the stability of a Clinton regime but in the end they voted for growth policy following a Donald Trump victory. Whether or not the stock market's optimism will be mimicked in the economy is yet to be known, but for now we believe the euphoria could take us into year's end.

    Stocks often find a significant low in October, this year it seems that low might have been a few weeks late. Nevertheless, seasonal strength and one of the most convincing key reversals we've ever seen has us looking higher. That said, volatile markets can change quickly. The bulls will need to break above 2165, until this occurs the bears are still alive.

    Now that the election is over, the market "should" start focusing on the Fed.

     

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    After today, the payroll report seems like child's play

    The thing about tables is, they ALWAYS turn; the same can be said of market trends.

    Just as I was preparing to type the sentence, "In my decade+ experience as a commodity broker, I've never seen anything like what we saw in the euro today", a correspondent on CNBC pointed out the March 2009 euro rally. On March 18th of 2009, the Fed announced a round of Quantitative Easing that sent the dollar reeling and the euro soaring. On that particular day, the euro was up about 3.5%. At the peak of trade today, I believe the euro was up about 3.3%. (I'd to the math, but it won't change anything and I've had a long day).

    Ironically, we had been looking for the seasonal euro rally for several weeks with a short put strategy, but couldn't justify holding on to the trade into the ECB meeting. Instead, we decided to buy back our puts and sell strangles; a decision that, and the time, was sound in nature; but in hindsight was horrible. We were bullish, why get into a neutral strategy?

    Nevertheless, after a lot of intraday shucking and jiving, we appear to have survived. Unfortunately, I'm not sure many traders survived the day. The way the Euro was running high in clips of 10 to 20 pips at a time, is a clear indication of margin call buying and risk manager liquidation of futures accounts. We suspect the margin calls will continue into the night session and tomorrow (and this includes the ES). So look for another round of selling in the ES, and buying in the euro. We've heard rumours of some big hedge fund blow ups, and I can assure you there are enough retail trader casualties to fill a large graveyard.

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    This week's news docket is skimpy but be cautious of the Fed's Beige Book on Wednesday afternoon.

    I'm sure there will be plenty of headlines coming out of DC, as usual, but scheduled economic news is thin. This should leave traders focused on earnings, which are projected to be relatively positive. As mentioned in the previous newsletter, when earnings season arrives during a market dip it tends to be supportive. We suspect this time will conform to the norm, leading the S&P 500 futures higher for the next couple of weeks.

    With that said, don't underestimate the potential market reaction to Wednesday's Fed Beige Book. With the Fed's interest rate hike campaign in full force, the markets will be interested in knowing their thoughts on the domestic economy.

    Also, the early April stock market dip could have been tax related selling (investors liquefying to pay tax bills). However, post-tax deadline we could see funds flow back into the market equity.

  • the financial futures report

    It is early, but October has been the least volatile month...EVER.

    If today was the end of the month, this would be the quietest October on record and it would also be the quietest month ever. Of course, it is too early to suggest that is what is in store for the markets come October 31st, but it should at least offer some perspective.

    Further, it has been almost a year without a 3% drawdown in the S&P 500. This is the second longest run of its kind in history. If the market survives the next 10 days, it will beat the previous record. Keep in mind, 3% is literally a drop in the bucket. At today's price, that would be a mere 75 ES points.

    We don't when the dam will break, but we do know it always does, eventually. Traders should be on their toes. Afterall, investor complacency is at an all-time high and historically such environments haven't ended well.

    As mentioned in a previous newsletter, the University of Michigan stock market sentiment index measuring the percentage of investors that believe the stock market will be higher a year from now is at an all-time high. Similarly, credit spreads are near historical lows (this is the difference between the yield on high-risk securities and risk-free Treasury securities). Tight credit spreads suggest investors are reaching for yield and lack concern for economic turmoil (in short, they are complacent). The last time we saw such tight credit spreads was mid-2007, just prior to the financial collapse. We aren't predicting a repeat of 2007, we are simply saying the bulls should consider exercising caution. Is anybody familiar with "Old Man Partridge" from "Reminiscences of a Stock Operator"? The trend is only your friend until it ends.

  • the financial futures report

    The E-mini S&P traded lower two days in a row for the first time since late September.

    Although losses were minimal, the ES managed to settle in the red on two consecutive trading sessions to close out last week. In a normal market this wouldn't be worth a mention, but in this market, it is a rare occurrence. The last consecutive negative closes took place on September 25th and 26th. Before that, you have to scroll the chart back to early August!

    I doubt the _bulls_ are concerned in light of the fact that the ES is within 15 points of its all-time-highs. On the flip side, the _bears_ must be growing concerned over the fact that the seasonal tendencies from Thanksgiving through the end of the year generally call for higher stock prices.

    That said E-mini S&P futures traders are holding one of the longest positions we've seen this year. Thus, one has to wonder if the bulls will soon run out of capital. After all, most of the bears have already been squeezed out of positions. This is true even in the stock market, the percentage of outstanding short positions on individual equity products is near record lows.

  • Generally speaking, the stock index futures markets stumble into October

    The last week (or so) of September is notoriously weak for equities, and strong for Treasuries. We don't see any reason to buck the seasonal trend. After all, Friday's bloodbath on Wall Street is a sure fire sign that investors have not gotten over the mid-August stock market "crash".

    Although the Fed meeting is behind us, we still have to worry about the details of Janet Yellen's speech on Thursday at the University of Massachusetts-Amherst. Oddly enough, the financial markets sometimes react to non-FOMC speeches than they do the official Fed meetings. Be prepared for volatility.

  • the financial futures report

    Crude and the Yen reverse yesterday's moves, so does the ES

    Obviously, the market panicked a bit when in regard to the implication of a Yen rally. Although this is the highest we've seen the Yen in years, it is still historically cheap. Further, today's reversal suggests the unwinding of the carry trade isn't quite upon us. Accordingly, this should be somewhat supportive of the equity markets.

    On another note, the greenback is still trading sluggishly, but it has yet to break support. In theory, weakness in the dollar should help push commodity prices higher, and eventually the stock market as well. As a result, we'll need to keep an eye on the DX support near 93.00.

  • the financial futures report by futures broker carley garner

    The First 1% down day in the S&P 500 since October 11th.

    Finally, we are seeing the equity market correct. Traders have been waiting months for this, but I doubt it was everything they had hoped for. Although it is a relatively decent one-day sell-off, today's action was meaningless in comparison to the post-election night rally. Further, selling was orderly and without panic. The good news is, the market is looking healthier. Corrective trade is "normal" and should be expected. As crazy as it sounds, the market needs to be bearish before traders can get comfortably bullish and buying picks up.

    Today's shake-up is being blamed on yesterday's Congressional hearings and today's uncertainty regarding Thursday's health care vote in the House. The Republicans claim they have the 216 votes necessary to pass the bill, but some last minute amendments are raising concerns.

    As we've been stating in this newsletter, the markets had priced in political perfection but governments are designed for flawed operations (checks and balances). The financial markets could get rocky as the new administration attempts to administer change.

  • the financial futures report

    Trade tariff talk is just that, we've yet to get anything concrete. Yet, the market is emotional.

    This is nothing new, if there is anything we've learned from the first year (+) of the Trump presidency it is the conversation always starts with drama, but then settles down to something more reasonable. Unfortunately, the markets haven't quite figured that out yet. Those that believe markets are efficient, will have a hard time explaining what we've seen in the previous three or four trading sessions.

    Tariff discussions, without any concrete decisions, can't explain such big swings in asset prices. The only rational explanation for this type of volatility is (ironically) irrationality. Markets are emotional, and we are being reminded of that. The low volatility slumber of 2016 and 2017 were anomalies and are probably behind us.

    The "buy and holders" might not be happy with the market environment before us, but the reality is the expanded volatility will eventually provide opportunities for traders (particularly option sellers). Further, it might not feel like it but this is a healthier market than what we saw in late 2017 and January 2018.

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    Historically FOMC minutes have been an afterthought, but in today's climate they are a big deal to futures traders

    The futures markets have been hanging on every word that trickles from the mouths of Federal Reserve members. Even off-handed comments made on their personal time have been moving through the grape vines.

    Today's FOMC minutes didn't offer any surprises. The Fed feels like the U.S. economy is moving in the right direction, which justifies a rate hike. But overseas market turmoil (namely China) has them pressing pause. The market seemed to like what they heard.

    In more bullish equity market news, the Chinese stock market opened for trade today after being closed for an entire week in observance of a national holiday (this is odd to us because it is essentially illegal in the U.S for the stock exchange to be closed more than 3 consecutive days). Once the bell rung, Asian traders bid prices higher to catch up with the global equity market rally that had taken place without them.

  • the financial futures report

    Even the most bearish of the bears couldn't have predicted the bloodbath we've seen in the equity index futures markets since posting a August 18th high. As experienced futures brokers, we've lived through the 2008 financial crisis, the 2010 flash crash, and the August 2011 Federal budget crisis collapse; however, we've never seen a sell off quite like this one.

    It is no secret that the U.S. equity markets were in desperate need of a "good" correction. In fact, many very smart (and otherwise successful) traders lost a lot of money attempting to time the down-draft. Nevertheless, it is difficult to rationalize this type of quick repricing in the absence of substantial changes in fundamentals. We certainly agree that the China story is worth monitoring, and will be a drag on the global economy but the truth is the U.S. economy only relies on exporting for 10 to 15% of GDP.

    The futures markets are ultimately driven by people, who are driven by emotions. Once the panic and the margin calls work their way out of the system, we suspect the e-mini S&P futures will recover sharply into year end. With that said, bottoms are a process...and they are messy. We'll likely see a retest of yesterday's flushing low, or moderately lower (1800ish), before real buying comes into the ES futures contract.

     

  • the financial futures report

    In today's DeCarley Perspective (see here:https://madmimi.com/s/f78468) we noted the fact that the VIX is trading at historically depressed levels. Specifically, VIX futures near 15.00 and the cash market VIX near 11.00 is a relatively rare event. Even more interesting, is the fact that the VIX rarely stays at such depressed levels for long. This is because at such levels the market is discounting nearly all event risk. Traders are simply complacent, or as a former colleague might have said, "they are fat, dumb, and happy."

    On the flip side, if we are right about the VIX being near a low, the ES should be near a high.

  • the financial futures report

    For Futures Traders, the Countdown to the Fed is on

    Six days from now we'll finally find out whether or not the Fed believes initiating a rate hike is a good idea. The investment community is polarized by the debate, and it seems the Fed might be too. We are still of the belief that they won't be looking to make any moves until the October or December meeting (most likely December), but either way the impact on the economy will be minimal.

    Even if they raise the overnight borrowing rate a full percentage point over the next year, funds will be historically cheap. With that said, we will likely see a knee jerk reaction to the first rate hike but that doesn't mean the actual value of financial assets have changed. More often than not, equity markets moved higher overall in the early stages of a rate hike campaign.

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    Implied volatility in the S&P 500 is in the tank, is this a sign of things to come?

    Traders have been asking themselves all summer how low volatility can go. Thus far, the question hasn't been answered. Although it is true that we never expected volatility, and specifically the VIX, to reach the depths we've seen in recent weeks, we also know this is not a permanent market state. In the moment, complacency can feel like it lasts forever, but in reality it never does.

    The chart above depicts the implied volatility of S&P options on futures according to MRCI (implied volatility is simply the expectations of future volatility built into option pricing). It is apparent that as we approach 8% in implied volatility, the odds are swiftly in favor of a change in sentiment (higher volatility and likely lower stock prices). According to this study, the implied volatility has never dipped below 8%, and has bottomed near 8% on two other occasions since 2002.

    Now is (roughly)the cheapest time in well over a decade to by S&P put options. It might be worth having a few lottery ticket flyers out there. For instance, the December 1850 puts can be bought for about $425 and give you 100 days in the market with risk under $500.

     

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