Commercial Traders Own the Stock Market’s Gyrations

The stock market doesn’t seem to know whether good news is good or bad news is good. The equity markets have sold off between 4 and 6 percent since we published this key reversal in early March with the small cap Russell 2000 and Nasdaq 100 tech stocks peaking a month before the big Dow and S&P stocks rolled over. April’s unemployment report supplied the catalyst for the Dow and S&P sell off but again the question becomes, “is bad news still good for business friendly easy monetary policies or, does good news mean we’re finally back on track?” Based on a number of factors, it appears the answer is somewhere in the middle. The Goldilocks equity market likes its data neither too hot nor, too cold.

Unemployment numbers here in the U.S. are generally improving. They’re moving fast enough to keep the headline rate falling, now at 6.7% for the last two months but also slow enough that our new Federal Reserve Chair, Janet Yellin continues to speak in dovish tones. The closest thing to wage inflation we’ve seen are more people actually going out and looking for work again. Furthermore, gas, food and home prices have all remained in check. We’ve survived a terrible winter and the energy spike has passed. Finally, the same winter weather is being used to write off the poor homebuilder numbers. Meanwhile all of this is occurring as the Fed reduces its monthly contributions to rate manipulation.

Overseas, we’re getting the same type of middle of the road data. China’s GDP numbers came out lower than expected but not by much.  Bulls stand firm in the idea that China’s ability to act over their own economy will prevent an economic, “hard landing” as the world’s number one economy gradually slows. Meanwhile, England’s jobless rate just fell to 6.9%, it’s lowest rate in the last five years and recent European Union inflation rates remain tame in front of the improving employment outlook. Finally, the issues in Ukraine have created a new source of military flows just when the global superpowers began to put their toys away. Barring an actual conflict, this just helps keep the economic war machine turning.

Shifting gears from sentiment data to actual market data reveals what is quickly becoming a traders’ market. We’ve discussed our general idea that the stock market’s volatility may well outweigh its returns in 2014. This bodes poorly for buy and hold but provides opportunities to traders via the markets’ gyrations. The general orderliness of the markets despite or, because of the world’s news events has actually been pretty remarkable. The commercial traders are off to a fantastic 2014 and seem to view the current sell off as another buying opportunity.

We track the commercial traders carefully as we’ve found that their actions, collectively, are a consistent indicator of market direction. Commercial traders have bought nearly $8 billion worth of Nasdaq 100 and Russell 2000 stock index futures over the last month. Even more indicative of their willingness to buy are their actions in the S&P 500 where they’ve bought another $8 billion worth of stock index futures. This is a big deal because the S&P 500 futures have only turned lower in the last two weeks. Therefore, we can see how eager they have been to jump in and buy the market on this decline.

We are going to side with the Goldilocks scenario and assume that most news is not news and that good buys are simply, good buys. We’ll continue to follow the commercial traders’ lead and try to carve out profits via the markets’ gyrations rather than buy and hold. We’ll even look for the short trades as we did in March through the Nasdaq and Russell and finally the commitment of traders sell signal in the S&P 500 on April 3rd.


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