Tag Archives: nasdaq

Stock Indices Bottom at 2015 Lows

Most of our trading is based on the consensus opinion of the commercial trader group as reported in the weekly Commitment of Traders report. We track their behavior in a couple of different ways but the simple conclusion is that we want to buy when they’re buying and sell when they’re selling. You’ll see the net commercial trader position plotted in the second pane of the stock index charts, below. We measure their actions on a sum and momentum basis. This allows us to determine how anxious the commercial traders are to get their trades executed at a given price level which, in turn, tells us a lot about the importance of a given area. Obviously, the previous year’s lows are an important area. Based on the collective actions of the commercial traders across the major indices, we’ve issued a COT Buy signal.

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Record Selling in S&P 500

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.

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Equity Rally Waves a Caution Flag

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.

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Diminishing Effects of Global Quantitative Easing

More specifically, this piece should be titled, “Diminishing Effects of Global Quantitative Easing in a Long Only Portfolio,” but that seemed a little long. Have we returned to an era where bad economic news guarantees the action of sovereign nations to prop their markets up? Does bad news make front running the Bank of Japan’s direct equity purchases a sure thing? Have we globalized the, “Bernanke Put?” The European Central Bank, the Bank of Japan and the Peoples’ Bank of China have all enacted accommodative interest rate policies since September 8th. Since then, the various global equity markets had all sold off and are now at or near new highs.

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All Set for the Stock Market Top

John Mauldin recently wrapped up his annual Strategic Investment Conference and shared some insights from his illustrious speakers. In his world, the information he passed on in his summary was simply nuggets. In my world, I had to go digging for context to put it all together. As a trader, I live in a day-by-day world. As such, it’s easy to lose track of the big picture and at times, the proper context from which to view the macroeconomic landscape. Reading the notes from Mauldin’s speakers clearly illustrated two main points for my own trading.

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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.

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Not Quite Time for Gold to Shine

The gold futures market is still looking for support since reaching a high near $1,800 per ounce in early October. The market had fallen by nearly $200 per ounce as recently as early this month. Fiscal cliff issues as well as tax and estate laws fueled some of the selling. However, commercial traders were the dominant sellers above $1,700 per ounce as they sold off their summer purchases made below $1,600. I believe the gold market has one more sell-off left in it before it can turn higher with any sustainability.

Comparatively speaking, gold held its own against the Dow in 2012 with both of them registering gains around 7% for the year. However, the more nimble companies of the S&P 500 and Nasdaq soundly trounced the returns of each, registering gains of 13% and 16%, respectively. The relative advantage of gold in uncertain times may be running its course. There currently is no inflation to worry about and CEO’s are learning how to increase productivity to compensate for increased legislative costs. Finally, the S&P has risen by about 19% over the last 10 years while gold has rallied by more than 250%. Therefore, sideways market action in gold over the last couple of years seems justified.

Meanwhile, seasonal and fundamental support for gold hasn’t provided much of a kick over the last two months. Typically, the Indian wedding season creates a big source of physical demand in the gold market from late September through the New Year. In fact, the strongest seasonal period for gold is from late August through October in anticipation of this season. This effect should be gaining strength due to the rise of the middle and upper middle classes in India yet, the market seemed to absorb this support with nary a rally to be had. I think we’ll see the market’s second strongest period, which begins now, and runs through the first week of February provide us with a tradable bottom and rally point.

Finally, the last of the short-term negatives is the strength of the U.S. Dollar. The U.S. Dollar trades opposite the gold market. Gold falls when the Dollar rallies because the stronger Dollar buys more, “stuff” on the open market and while we’ve talked about commercial traders buying gold, they’ve also been buying the U.S. Dollar Index. Commercial traders have fully supported the Dollar Index at the 79.00 level. The Dollar Index traded to a low of 79.01 on December 19th followed by a recent test of that low down to 79.40. The re-test of the 79.00 low has created a bullish divergence in technical indicators suggesting that this low may be the bottom and could lead to a run back to the top of its trading range around 81.50. This can also be confirmed in the Euro Currency and the Japanese Yen. The Euro currency futures market has seen commercial traders sell more than 120,000 contracts in the last six weeks as the market has rallied from 1.29 to 1.34 per Dollar. Meanwhile Japan’s new Prime Minister, Shinzo Abe, has turned the country’s monetary presses up to 11 in an attempt to jump-start their domestic economy.

The absence of an expected rally in the gold market through the last few weeks leads me to believe that the internals simply don’t support these price levels, yet. Therefore, the market will continue to seek a price low enough to attract new buyers beyond the commercial traders’ value area. Typically, this would lead to a washout of some sort that may force the gold market to test its 2012 lows around $1,540 per ounce before finding a bottom.

Furthermore, the flush in gold would most likely be accompanied by a rally in the U.S. Dollar and could push it back above the previously mentioned 81.50 level. Proper negotiation and resolution of the pending debt ceiling would most likely exacerbate both of these scenarios while also including a large stock market rally. Conversely, a legislative fiasco would lead to a Dollar washout, as the global economies would lose faith in our ability to manage ourselves and treat our markets accordingly. Therefore, in spite of the inter-market, fundamental and technical analyses we will keep our protective stops close on our long Dollar position while waiting for an opportunity to buy gold at discount prices for the long haul.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.

The Stock Market Bounce is for Real

We published a sell signal for the S&P 500 in our October 4th article, “Who is Pushing the Stock Market.” Several fundamental and technical reasons were laid out. The fact that the market topped out the very next day and sold off by 9% in the last month leads me to believe that this decline may have run its course. The easy money on the sell side has been made and perhaps, we should start looking at the buy side of the market.

Separating the, “what happened” from the “why did it happen” is always tough. Throwing political variables like the election and the Euro crisis into the mix along with individual accommodations for the fiscal cliff and estate planning leaves us with very real macro and micro implications currently in play. We’ll take a brief look at these and see why the odds may be stacking up in favor of the buy side of the market.

The markets clearly viewed the election results in a negative light by selling off 6.3% in eight trading sessions. I think the markets were fully prepared for an Obama victory prior to the debates however Romney’s debate performance was just enough to make it a bit of a race. Therefore, investors chose to hold on through the election just in case Mitt pulled it off. Had Mitt won, we wouldn’t have seen the selling pressure. Obama’s victory guarantees higher taxes going forward. Therefore, many people are rebalancing their portfolios to take advantage of the tax laws as they stand in 2012. That answers some of the, “why” for the decline.

Commercial traders greeted the sell off in the markets with open arms. Traders in the Nasdaq and Dow Jones were major buyers, doubling their net long position in the Nasdaq and increasing their position in the Dow Jones by more than 50%. The major surge in commercial buying has pushed momentum back in favor of the bulls. Furthermore, combining the recent sell off with commercial trader buying has provided us with a Commitment of Traders buy signal. This is the methodology I presented at the World Traders Expo in Chicago last month.

Further bullish indicators focus on the extremely bearish sentiment of the trading public. Without getting into too much detail, many of the indicators that measure investor sentiment are exceptionally bearish. These readings typically mean the opposite is about to happen because the investing public typically does the exact opposite of what they should do. This one of the primary reasons we follow the commercial traders, rather than the small speculators.

Technically speaking, there are two key points. First of all, the sell off pushed us to a new three month low. Secondly, the about face reversal the market pulled provided indication of a major rejection of that low. The rally on the 19th was so strong that 90% of roughly 2,800 stocks traded on the NYSE closed higher. That kind of rally provides a statistically valid bottoming signal. Merrill Lynch was the first to capitalize on the statistical relevance stating that since 2006 there have been 1,733 trading days and this type of day has been observed only 62 times. The relevant pattern is that we should pause for a couple of days before resuming our climb through the 10, 20, 30 and 65 day moving averages which come in at 1372, 1388, 1404 and 1417 respectively.

One last piece of evidence of the rejection of the new three-month low made on the 16th is that the market immediately opened .5% higher and continued to climb another 1.5% for the day. The strong rally off the multi month low has only occurred 9 times since the Daily Sentiment Report has been tracking this and their research shows 7 of the 9 led to multi week bull runs. The two that didn’t pan out were both in the months following the tragic events of September 11th.

The sell off that we anticipated came to fruition however, I believe it’s much harder to turn around and buy the market when the media is so full of naysayers. To them, I would concede that not coming to an agreement on the fiscal cliff would send the stock market much lower. However, I believe that they will reach some type of settlement. The market will gyrate according to the most recent piece of news but ultimately it will climb higher. Finally, we cannot let sentiment overrule quantitative analysis. To ignore the facts would be choosing to live in ignorance.

This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.