I understand that our weekly readers may feel like we’re beating a dead horse over the last few weeks. We’ve stated and re-stated various reasons for our concerns regarding the equity markets and this week has provided yet more fuel for the warning signal. First of all, let me begin with my personal bias by stating that, as an S&P 500 pit trader whose only decade on the floor was the 1990’s, I’m used to making money on the long side. However, there are enough warning signs in the marketplace right now that I won’t take a long position home. I believe the next home run trade in these markets will be on the short side and this week, I’ll provide one more big money example.
I frequently talk about using the commercial traders as a proxy for fundamental information. Commercial traders’ pinpoint focus on the markets they trade takes into account the supply and demand structure within their individual markets, including stocks and bonds. Furthermore, their actions within the markets they trade literally, tell us what they expect to happen within their market going forward. Thus, our thesis that, “No one knows the markets they trade like those whose livelihood is based directly upon the correct forecasting of their market.” All things being equal, when my analysis of the fundamentals seems confounded, I defer to the respective experts within their markets. Finally, when the market sectors are analyzed in total, commercial traders’ actions can lead to a bigger picture. The recent shift in their positions within the financial markets leads me to believe Continue reading Expected Turbulence in the Financial Markets
The equity markets have been THE place to be for capital appreciation over the last few years. Last year saw the Dow Jones under perform with a 9.6% return compared to the S&P 500 at 13% and the Nasdaq 100 at a whopping 19%. In spite of the impressive returns provided by the stock index futures last year, there were still periods of flatness and even outright declines. In fact, the Nasdaq had a decline of more than 10% from peak to trough at one point last year, in spite of its 19% return for the calendar year. This week, we’ll discuss a method of applying the commercial traders data from the weekly CFTC Commitment of Traders reports to the equity markets in an attempt to preserve profits gained on the long side of the markets as well as profiting from forecasted declines.
The “January effect” has had little impact on the US equity markets this year. It is becoming more and more obvious that the typical January effect is now coming in two waves. The first wave comes from year end bonuses, automatic portfolio purchases and speculators trying to get a jump on the year’s index performance. The second wave is based on conscious thought rather than habit or speculation. Based on the commercial trader behavior in the Nasdaq 100 futures it appears that we may be nearing a rational buying opportunity as you can see on the chart below.
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.