The Choppy Path To S&P 1900

The S&P futures (CME:SPM14 ) made yet another all-time new contract high yesterday, as we suspected it would. After opening in the 1894.50 to 1889.00 area the S&P started moving higher again, but after the initial burst the futures started to sell off midday and never regained its footing or the highs.

After trading down to 1892.00 the ESM14 rallied back up the the 1895 area and settled up 1.5 handles at 1894.30. Most of the day's trade was an extremely low-volume chop.

Volume matters

There is little doubt that investors have cut back from trading over the last several years. It is clearly seen in the NYSE volume and the S&P 500 futures volume every day. The NYSE that used to print 500 million shares or more on the open is down to doing just over 700,000 mil shares a day.

In most cases the NYSE total day volume is just over 400,000 mil shares going into 3:30 ET and prints over 200 to 250 million shares on the closing print at 4:00. Most of that is ETFs.

The CME Group's S&P 500 that used to do 2-3 million contracts a day is down to an average of 1.4 million contracts a day, with yesterday's total volume just over 1 million contracts. That included 200,000 contracts traded on the Globex electronic exchange, before the market open.

Where is the money?

Program and algorithmic trading in the index make up nearly 70% of the S&P 500 futures volume. If total volume was 1 million contracts and 200,000 came pre-open, that leaves 800,000 contracts in the day session, and if you take out the 70% for program trading that only leaves 240,000 contracts traded in the day session; that is a far cry from the S&P's all-time volume record of 6.69 million contracts in one day.

Overnight, the Asian markets closed modestly higher, and Europe is trading modestly lower. Today's economic schedule starts with MBA purchase applications, Producer Price Index, Atlanta Fed business inflation expectations, Housing Market Index, EIA Petroleum Report and earnings from Agilent Technologies (NYSE:A), Macy's (NYSE:M), Cisco Systems (Nasdaq:CSCO), and Pinnacle Foods (NYSE: PF).

Our view

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The S&P did pretty much what we thought it would do yesterday. According to the S&P cash study, the Wednesday before the May expiration has been up 16 / down 14 of the last 30 occasions.

Here is how we see it: The S&P is going to 1900 and beyond, but it never does what "everyone" wants it to do when they want it. As bullish as we are, we also want to be cautious. We lean to selling the early rally and buying weakness.

Our friend Cyrus did a study of what I have been talking about for months.
He ran a quick study using the following constraints…
1) New 50-day high
2) Volume below 30-day average
3) Since 1965
He found that the market's price movement under those conditions was bullish over a 6-month time period and 12 months, but mildly bearish for shorter time frames. Cyrus points out, "This matches with your intuition … a pop up to new highs leads to a period of consolidation and pullback …"

As always, please keep an eye on the 10-handle rule and please use stops when trading futures and options.

In Asia, 8 of 11 markets closed higher: Shanghai Comp. -0.14%, Hang Seng +1.03%, Nikkei -0.14%. In Europe, 8 of 12 markets are trading lower: DAX -0.16%, FTSE -0.16% Morning headline: "S&P Futures Seen Lower Ahead of Inflation Data" Fair value: S&P -3.45, Nasdaq -2.19 , Dow -37.87 Total volume: LOW 1mil ESM and 4.7K SPM traded Economic and earnings calendar: MBA Purchase Applications, Producer Price Index, Atlanta Fed Business Inflation Expectations, Housing Market Index, EIA Petroleum Report and earnings from Agilent Technologies (NYSE: A), Macy's (NYSE: M), Cisco Systems (Nasdaq: CSCO), and Pinnacle Foods (NYSE: PF).

The following article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

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