Bullish Traders May Like This Remarkable Contrarian Signal

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By Jamie Chisholm

Critical information for the US trading day

Early Friday futures action suggested Wall Street may be able to turn three positive days in a row

Sophisticated investors will be wary, however. It hasn’t benefited either bulls or bears lately to assume that a march in either direction can be sustained for long without containing sharp reversals.

For example, over the past six months, the S&P 500 has seen a 16% decline, then a 7% recovery, followed by a 12% decline, a 17% gain, and a 17% decline. 9%.

So how should traders – those with a short-term horizon – navigate such choppy markets? The answer: Look for extremes in momentum and positioning, then plan your contrarianism accordingly.

It is the inference of Jason Goepfert, director of research at SentimenTrader, which provides a surprising picture on the positioning to illustrate. More on that in a minute.

Consider momentum first. One of its most watched metrics is the 14-day Relative Strength Index, where a move significantly above 70 is considered overbought territory and a slide below 30 is considered oversold.

At the S&P 500 low of 3,667 in mid-June, the RSI hit 28, providing a contrarian buy signal. Two months later, the S&P 500 hit its recent high at 4,305 and the RSI was close to 80. Time to sell. Similarly, at this week’s low, the RSI fell below 30 again. Cue the rebound.

By the way, any forex trader lamenting being caught off guard by the Japanese yen’s strong rally from 24-year lows on Friday, might consider the risk they were taking by maintaining a short position in the yen as the USD/JPY 14-day mid-week RSI touched 88.

So, place to positioning. SentimenTrader’s Goepfert describes the chart below as the most remarkable he has seen in his career. It shows the net dollar value of the premiums that institutional traders spent to buy open calls minus the purchase of open put options. The lower the blue line, the more they spent on puts.

He explains that, last week, traders of fifty or more contracts bought to open nearly five million put options, spending $8.1 billion on those contracts, nearly double the amount in any other week. in 22 years.

There is a caveat: “With options trading, it is essential to consider both sides. Sometimes when there is a spike in buying puts, it is because the volume overall is higher and there is a coincident spike in call buying, so we prefer to clean them up, as shown in the chart below,” says Goepfert.

Yet it suggests that the biggest traders in the options market are “buying crash protection at a rate unprecedented in the market… Regardless of the explanations, the data is clear – institutional traders are in for a mad rush.” for protection,” he concludes.

Opposites, unite!

Markets

S&P 500 futures rose 0.9% to 4041, and U.S. crude futures rose 2.2% to $85.25 a barrel.

The 10-year US Treasury yield fell 7.2 basis points to 3.251%, while the weaker dollar helped Bitcoin jump 9.3% to $21,164 and gold to add 0.8 % at $1,733 an ounce.

The buzz

More chatter is expected Friday from Fed officials before the central bank runs out of power ahead of the two-day policymaking meeting starting September 20. Chicago Fed President Charles Evans is scheduled to speak at 10 a.m., Fed Governor Chris Waller and Kansas City Fed President Esther George are scheduled to speak, separately, at noon. All times Eastern.

The U.S. dollar index was retreating from new 20-year highs after traders were reminded how chasing the currency bandwagon with wild abandon can be a risky game. “Sudden movements in exchange rates increase uncertainty for businesses and are undesirable,” Bank of Japan Governor Haruhiko Kuroda said on Friday. The prospect of BoJ intervention pushed the yen to a 24-year low and also gave the pound and the euro a boost.

Citigroup (C) has won an appeal over $500 million it mistakenly sent to hedge funds as part of a Revlon loan.

Better news came from Europe where the benchmark measure of natural gas, the future ICE Dutch TTF, slipped another 5% to 208.9 euros per megawatt hour. Less than three weeks ago, the price was around 350 euros pmh.

“Sell in May and leave and return on St Leger’s Day”. This is the full UK quote for the old and controversial market saying. The 245th running of the St Leger horse race, the final classic of the British flat season, was due to take place at its traditional home in Doncaster, South Yorkshire, on Saturday. The race was suspended on Friday due to the death of Queen Elizabeth II and, at the time of writing, it was unclear whether the St Leger would continue. New London, the bay colt of Sheikh Mohammed, was the favourite.

The Bank of England announced on Friday that it would postpone its rate-setting meeting for a week until September 22, to allow for a period of mourning.

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Table

IHS Markit’s PMI trade surveys contain a backlog indicator, which it describes as capturing “the volume of orders a business has received but has not yet started work or completed.” It is a useful barometer of the extent to which companies are struggling to keep up with demand and as such can “provide useful insights into pricing power and changing market trends. ‘inflation”.

As the chart below shows, it tends to move in unison with US Treasury yields – although there has been some dislocation due to the pandemic shutdown. Callum Thomas, Head of Research at Topdown Charts, asks: “It’s taken a while for bond yields to catch up with rising arrears, but now the open question is how long will bond yields take bondholders to catch up on arrears?

Best Tickers

Here are the most active stock tickers on MarketWatch as of 6 a.m. Eastern Time.

Ticker  Security name 
TSLA    Tesla 
GME     GameStop 
AMC     AMC Entertainment 
BBBY    Bed Bath & Beyond 
AAPL    Apple 
NIO     NIO 
APE     AMC Entertainment preferred 
AMZN    Amazon.com 
NVDA    Nvidia 
MULN    Mullen Automotive 

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-Jamie Chisholm

 

(END) Dow Jones Newswire

09-09-22 0851ET

Copyright (c) 2022 Dow Jones & Company, Inc.

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