Last week, we noted that the declining volatility of option prices ahead of this Wednesday’s FOMC meeting was curious, to say the least. As we dug in, we noted the broader scope of this trend towards declining option volatility. Today, I’ll show you another way of using the Commitments of Traders report to track investor sentiment and in this case, why the correspondingly bullish put/call ratio via the large speculators is probably bad news for the stock market.
The S&P 500 is making all-time highs ahead of the triple witching expiration of the underlying futures, futures options and cash options next Friday, June 17th. While this combination can be precarious in its own right, the fact that it comes two days after one of the most highly anticipated Federal Open Market Committee (FOMC) meetings in recent history could make it truly pivotal for the remainder of the year. This week, we’ll focus on the S&P 500 and a combination of factors that could sustain a breakout in either direction based on the FOMC’s actions or, inaction.
There are a number of important changes taking place in the S&P 500 stock index futures. Normally, we focus on short-term swing trading opportunities. However, when something structural appears to be changing, it’s important to take note. The small speculators who bought the August decline expecting a strong closing quarter are very near to fighting a losing battle. Furthermore when the rapidly declining open interest and currently low volatility are factored in it doesn’t look like the small specs are going to get the strength they’d hoped for.
Every one of the major U.S. stock indices has sold off more than 10% in the last week. This will finally put an end to the, “But the market is due for a 10% correction” argument. I began trading in the S&P 500 pit in the early 1990’s. Therefore, it has been my experience that I can make more money on the long side of the equities, more often than I can hoping to catch the major downdraft. The S&P 500, the broadest and biggest of the indices knocked out a year’s worth of gains in three days. Now that we’ve gotten the drop, let’s see what we can buy.
It sure seems like everything in the news has been full of alarm bells lately due to Greece, China and falling oil prices in one form or another. Frankly, China’s impact on the US equity markets may be just the buying opportunity we’re looking for as several factors combine to point towards strength through the expiration of the September Dow Jones futures contract on September 18th.
Traders and commentators often use the phrase, “Dog days of August” to describe market action. Unfortunately, the general public seems to view this as a statement of late summer weakness, rather than as the low volume, stagnant, range trading action that it actually means. The S&P 500 has been in a 5% sideways trading range between2020 and 2120 since February. We’ll look at option, technical and seasonal analysis that could push this market to new highs and break the summer doldrums.
We’ve discussed the peculiarities of the stock index futures’ expiration cycle in detail here before.
Commercial traders in the stock index futures behave quite differently than the Index traders or, small speculators who act as their counterparts. Collectively, this is perfectly logical. Index traders are positive feedback traders. Positive feedback traders add on to their bullish positions as the market climbs and scale out of their bullish positions as the market declines. This keeps their portfolio balanced to their available cash resources. This also places them on the side most likely to buy the highs and sell the lows. Typical trend following. Small speculators are a sentiment wild card. Their position is more price and sentiment based than anything else. The randomness of their sentiment makes their positions too yielding to lean on.