As a sanity check, I went back through several years of on-line historical data to look at the differences in the futures roll-overs from the lead contract to the next contract using the ES E-mini futures. The sample of data is listed in the table below. To conduct this study, I used the closing prices on the date which was the fifth day prior to the expiration of the lead contract and compared it to the roll-over contract on the same date. The differences are shown in the right-hand column.
Having followed futures trading for most of the 2000's, it was my observation that the futures roll-overs being a premium of -6 points to +6 points just wasn't much of a problem. It was seemingly pretty much at random, and it was a fairly small percentage of the price level. For example, at 6 points of 1,770 points it was about 0.33% of the price level at the time.
But, after the Covid years, the futures premiums have absolutely exploded. Not only are the numerical levels much larger in absolute value, but in terms of the price level the premiums are now 0.85% to 1.20% of the notional price.
This situation is absurd. First, why does it cost one much, much more to roll a contract now than it did before? As shown above, this is not just a function of the price level. Second, one now needs to consider how this extremely absurd amount of roll-over will affect chart structures (triangles or diagonals in progress, for example) when using the roll-over contracts (typically /ES in ThinkorSwim, or ES1! in TradingView).
I have highlighted this matter before. The point is that the roll-over used to be largely a non-event. And now it has become a major event that has to be managed for some reason. And that reason simply is not clear.
This is the second post since Thursday. Have an excellent rest of the weekend.
TraderJoe
Interest rates are a lot higher and dividends are low.
ReplyDeleteIF that were a factor then, either the roll-contract is priced too high, OR the lead contract is priced too low at the time. There may be nothing that explains this except sheer outright bullishness: institutions are willing to 'pay up' for the privilege of owning stocks because they assume the FED is trapped into supporting the markets or suffer dire consequences. So, they sell the futures at outrageously high prices and buy the stocks in typical arbitrage plays. That's just a guess. I do not have supporting data from Goldman, Blackrock, etc. TJ.
DeleteSo it would lose daily about 0.75 point for next 90 days. I take it
Delete@Jack.. what is 'it' that you are referring to? TJ.
DeleteElliott Wave assumes price moves in one smooth, continuous line that reflects how traders feel over time.
DeleteWhen contracts roll, prices move for mechanical reasons, not because traders suddenly changed their minds. Does this break the main assumption behind EW?
There’s no perfect trading system. Markets have been manipulated forever. This is a game without rules. The market is extremely bullish. Margin debt is close almost at 1.2 trillion, cash levels at historic lows, money mangers are the most bullish ever, AAII sentiment is at 52 week highs, and the outspoken bears are capitulating. The DOW, S&P, Nasdaq are all hitting major resistance at the top of the channel going back decades or 90 years.
If this isn’t a setup for a major crash, then I don’t know what else we need. Every crash over the last 20 years happens in the 1st quarter.
The QQQ still has a gap to fill at the 629.85. The SPY will probably make new highs to make one more touch of upper channel like it did in 2022 before the 20% decline.
I have learned that over-head gaps must be respected, no matter how implausible a fill may appear, so I fully expect the closure of that one.
Delete@Tim .. there is nothing in Elliott Wave that assumes, "price moves in one smooth, continuous line that reflects how traders feel over time." I have read every Elliott Wave reference I can find, and the phrase "smooth, continuous" is simply not to be found. In fact, that primary assumption is that markets move as 'jagged movements' or fractals at every degree of trend (even micro, nano, etc.) is the basis of EW. You have 'made up' the terms "smooth, continuous" as applied to Elliott Wave.
DeleteAs for the remainder of your comments, that's why locally I have suggested keeping it simple at the moment. The Smart Money can 'gap up' if they want. They did. Prices are still in an up parallel. Prices are up until they can be shown to have reversed.
TJ
ES/SPY (CFD) 1-hr: if there was a triangle, then hourly has hit the level of c/iii = a/i.
ReplyDeletehttps://www.tradingview.com/x/R30iw5Po/
TJ
These suggested levels would be the potential overlaps should it get to that.
Deletehttps://www.tradingview.com/x/SLVqL4w4/
TJ
"Santa Claus rally?" 🎅
DeleteSeasonals are not "Elliott Wave Theory", I know. 🤦 Sorry TJ.
@HG .. to 'some extent' seasonals reflect how people generally feel at the time, when they often want to take their profits, etc. 🎄, when they spend money on gifts (including gifts of stocks, bonds, college funds, etc.), when they go on vacation, and other cyclic activities. And so, they form some of the cyclic component of wave cycles. But they are certainly not the whole story, nor do they always work. TJ.
DeleteHi TJ, I don't know how roll exactly effects Elliott Wave, but as far as function of rolling goes - it has been done the same way for years. The reason for big difference in rollovers in your table is simply size of contract and cost of carry...interest rates. The size of mini ES contract is just under $350,000 now, so small change in rates has significant effect on rolling difference. Where you see negative numbers in your table - was the time when rates on the contract were less than combined dividend of S&P 500. So now the premium is more because rates exceed dividends and that what makes for current premium and the difference in old and new contract.
ReplyDeleteBest,
Simon
Item #1 in the table is at an S&P of 1,291. So, the notional ES at that point is $50 x 1,291 = $64,550. The last item in the table is at S&P of 6,823, so the notional value of the ES at that point is $341,150. And the ratio of the two is a ratio of 5.28; but the ratio of the pre-covid vs covid premiums is at least 10 : 1; which is double. So, let's say interest rates were at a point where int = div exactly. That would be somewhere like 1 - 2%. So, please explain how you see the interest rates affecting the situation. Thanks in advance. TJ.
DeleteThe roll difference is interest yield minus dividend yield. And you are right in a way it is the bullishness that is expressed there, its similar to 1999/2000.
DeleteI keep watching /ZB waiting for it to find its copy of Willie Nelson's "Turn out the Lights".
ReplyDeleteMade a local new high
ReplyDeleteHi TJ, I think I understand where confusion comes from. Comparing Premium ratios to cash during different periods does not offer us any new helpful insight. If we get half a point change in interest rates tomorrow, for example, this ratio can double or be cut in half overnight. It is simply the difference between value of Futures and cash, and is always a very small number in relation to either. So even small change in rates or dividends have a big weight on it. I hope my explanation is clear enough.
ReplyDeleteSimon
No. It's not clear at all what you are saying. Can you provide an actual numerical example? TJ.
DeleteLooking a new ATH on deck...
ReplyDeleteA new post is started for the next day.
ReplyDeleteTJ.