Snoopy-Typing-Away-1-CVV14J0D95-1024x768

Life’s but a walking shadow, a poor player, that struts and frets his hour upon the stage, and then is heard no more; it is a tale told by an idiot, full of sound and fury, signifying nothing.
William Shakespeare

This week’s COT index number is +15.3%, which improves upon last week’s number and suggests that this rally is sustainable.

The thing to note with the COT number is that to show this particular level of expansion [+5%] the volume required in purchases to achieve this was +50%. To find a similar volume of contracts purchased we have to return to September 2013.

That volume was maintained for two weeks, and then the volume dropped off the edge of the cliff. This expansion/contraction in volume gave us a rally and decline in the market [the correlation being high] following the volume and COT index number expansion/contraction.

As we stand today, that volume expansion will need to be maintained at the current volume [or higher] or, we will see another contraction in the COT index number, which will find the double top region, or, false breakout chart pattern in the SPY index.

As we shall see from the short term technicals, there is nothing in particular to indicate one direction or another. However when you look at a 10yr chart, the SPY is hitting resistance. This rally from the lows represents in that time frame, the retest of that resistance. If it holds, the trend that has been in place since 2009 will suffer a far more serious reversal than we have seen to date.

As an indication, the VWAP average sits at $156.56. To fall to that level would have the pundits screaming bear market etc. In the rally from the lows of 2009, the market has returned to the VWAP on five occasions. The last was at the end of 2012.

Technical

This week in all the shorter time frames all are in up-trends. That however is about all the information that is really available. The support/resistance levels are all equidistant, so the price could trade either direction.

The 15day chart is the only chart that displays any support/resistance areas that might prove useful. Resistance is at $187.30’ish.

Based on those two observations, if long, remain long. If short, cover your shorts, and if out of the market, look for a long entry and avoid placing any short positions.

There seems to be bullish noises emanating from the big fund managers as to the state of the economy etc. I’m far from convinced on that point. It is however irrelevant to the point of view of trading unless you are taking a longer view into 2016 or beyond.

10 year bond yields are headed higher. In all likelihood they could hit 4% or slightly higher, depending on whether Yellen and the Fed keep curtailing QE purchases. Generally rising rates are a bad thing for equities. Rising yields from a suppressed point however will not necessarily have that [immediate] effect. But in a rising yield environment simply buying the market will not be as effective as buying individual stocks [that outperform on earnings growth] showing growth through revenues/profits rather than simply share re-purchases.

Summary

Taking everything into consideration, standing away from the market, or market neutral is the two safe options. Initiating short positions would be incredibly aggressive, although potentially lucrative given that markets tend to decline faster than they rise.

I’m increasingly bearish. With the [gradual] withdrawal of QE, which really as far as I am concerned was responsible for the one way market, the one way market could well be coming to an end. Technically we are there. It would require the Commercials to support the futures market with a tremendous volume of buying to keep the COT index number high…I don’t see it. Earnings etc in the SPY constituents as a group need to improve, and to date, they haven’t. EPS have been based on share buybacks. I don’t see that trend continuing. The unpopular view [especially as noted bears capitulated late last year] is that the bull is about to hit a major road bump in the dark.

The last clue is that spreads through the Options markets are tighter, expressing that the market makers have [no view] a lesser view of the market and are keeping it tight. There have been few new trades the last few weeks.

Advertisements