Hidden Strength in the S&P 500

The recent action in the equity markets has been volatile and confusing to say the least. Today, we’ll focus on the S&P 500 futures and the COT buy signal generated by the recent sell off. Later in the week, we’ll examine the decoupling between the Nasdaq 100 and the S&P 500 which could very well be the most obvious clue to the bigger picture.


The recent all-time high in the S&P 500 at 2110 from late February should have gone much higher. Technical analysis based on the chart’s consolidation between the 1960 and 2080, dating back to the October sell off should’ve led to a run towards 2200. However, we noticed some cracks in that armor as commercial momentum in the other indices turned negative and the S&P 500 put in what appeared at first glance to be a significant bearish divergence failure. In other words, momentum indicators like stochastics, RSI and others showed the new high in the S&P 500 futures to be significantly weaker than would be expected.

Clearly, the commercial traders have been big buyers on the market's declines. What does their recent bullishness mean at all time highs?
Clearly, the commercial traders have been big buyers on the market’s declines. What does their recent bullishness mean at all time highs?

This combination led to our concern over the broad market’s ability to maintain the rally as we published here two weeks ago in, “Equity Rally Waves a Caution Flag.” The topping action we were looking for appeared in the Dow and Nasdaq as predicted. However, the sell-off did not break down the S&P 500’s commercial trader buying streak which has now reached 12 straight weeks. Their support of this market, the largest of the stock index markets, reflects a nearly perfect 50% retracement at 2030, from the recent rally to new highs minus the current decline. Therefore, we’ll have to side with Thursday night’s COT Buy signal, which you can see along with the rest of the year’s signals below before turning completely bearish on the equity markets.

The commercial traders haven't caught every S&P 500 move over the last year but, their winning percentage has been pretty darn good.
The commercial traders haven’t caught every S&P 500 move over the last year but, their winning percentage has been pretty darn good.

Finally, the commercial traders’ support of the S&P can be seen clearly in the long-term S&P 500 chart which includes the record net long position they created in 2011. The jump in their buying on the recent weakness sends a clear message that there is a valuation battle taking place between the tech heavy Nasdaq 100 versus the more broadly based S&P 500. Our best guess going forward is that the S&P may in fact make another new high. If this is the case, we’ll be watching closely for confirmation by the other indices which hit their sell-off targets. Look for more on the equity index divergence later in the week.

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