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).