The Two and a half hour Market

Over the last week the market has gotten into the routine of having some volume for the first hour, then flat lining until 60 to 90 minutes before the cash close. Amazingly the overnight or globex sessions are having wider ranges. The range of the market after being open for an hour has become incredibly narrow. In fact on Friday we had basically a 2 point range from 9:30 CST to 1:30. Talk about putting someone to sleep! The volume continues to be light and the market grinds higher. Normally this would be a very negative development. A market moving higher on weak volume is seen as having a chink in the armor. But, the bulls scored a victory on Friday closing the S&P e-mini’s above 1125 and it looks like it can test new highs again.

Interestingly, earlier in the week, the market tried to make a new high over 1115 and JP Morgan offered to sell 1000 big S&P’s in the pit. This is the first time they have tried to sell this size in months. Our indicators are flashing warning signs again, with the market getting overbought and into a position where the excess will need to be worked off. Both the Treasury bonds and the S&P had moved into an overbought position last week, which is very unusual. Once the employment report was released, all was well, as the Fed and media had the weather and snow to blame for any increases in unemployment. The Treasuries showed that some normalcy still exists in the markets and had a quick correction.

These tight ranges have made for a difficult trading environment and many false moves being influenced by one big buyer or seller for a few minutes.

Regarding the appetite for risk and complacency, it has appeared to return. As long as the Fed remains easy and provides liquidity to the system, this environment will most likely persist. The VIX has moved into the 17.50 range and it does not look like too many investors are concerned about a pullback. At any rate, the market is building energy for a move one way or the other, once it resolves the tug of war between the bulls and bears.

When and not if the liquidity is removed from the market, beware. The Fed did it before in 1999 & 2000 and the consequences in equities were not pretty. Has the Fed learned anything from that past experience? Granted they have different leadership, but we think they are caught in a precarious situation. Leave things alone and things heat up and we see inflation. Raise rates and stymie the growth.

With the market being so choppy, we had a difficult time profiting in the S&P for the week. However, we kept a close eye on the risk management and were able to have a nice profit on a Treasury bond short position, ultimately finishing the week with a -.38% or so loss. We will continue to be patient and wait for opportunities that Mr. Market will offer, rather than trying to force the issue.