MrTopStep Mid-Month Equity View

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The Nasdaq and Russell 2000 futures both hit all-time highs yesterday, while the Dow Jones futures continued to trade under the March high. The S&P 500 futures are fighting hard to get back to 2800, but as of yesterday’s close, the index was trading roughly 100 handles from its all-time highs.

This week is the time for equity mid-month rebalancing. With all eight sessions of this month closing higher for the S&P 500 futures (ESU18), we expect the rebalancing to lead to some profit-taking. The quarterly quad witching expiration also occurs this week on Friday. Meanwhile, the FOMC meeting is scheduled for today.

While there are plenty of headline events on the economic calendar this week, we are not expecting the U.S. equity indices to trend hard in either direction. For now, it seems that headline risks have quieted, including the Italian bond situation and the Trump/Korea news.

These markets are starting to look forward to July’s Q2 earnings which follow this year’s historically strong Q1 earnings. This week, Bank of America/Merrill Lynch released its monthly survey of fund managers who reported that U.S. stocks are the most overweight that they have been in 15 years. At the same time, stock markets in  Europe, Asia, and emerging markets have experienced growing pessimism.

Our broader view into the end of this month is to buy rallies. It’s summertime and volume is declining, which is natural for this time of year. Daily ranges are narrowing as volatility is decreasing. The VIX will soon be back below $11 and start aiming for the $10 handle. We expect to see a lot of positioning in anticipation of good Q2 earnings in early July, and at least for now, the path is clear for equities.

For today, the 2:00 FOMC headlines

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