Ignore the noise and focus on the main event

Mid-week market update: Have you ever seen any technician publish the short-term analysis of the stock market just before a key event with a binary outcome, such as an FOMC decision, NFP report, or CPI report? How much confidence would you place in such a forecast?

As we await the outcome of the debt ceiling negotiations in Washington, the market is left to guessing the direction of stock prices. Analysts wind up focusing on indicators that have little or no value, such as the size of (former) Fed Chair Alan Greenspan’s briefcase. While negotiations are at an apparent impasse, we are left to guessing how much of the statements from each side is real and how much is bluff., or even the exact timing of X-date, or the day the U.S. Treasury runs out of money It’s highly likely a deal will be reached and the U.S. will not default on its debts, at this point it’s all noise as the S&P 500 remains in a trading band.



While we don’t know whether there will be a deal, some analysis of sentiment can yield some clues as to the degree of market reaction once the results of the binary event is known.



How short is the market?

I have seen sentiment analysis indicating that market participants are very short the equity market, which is contrarian bullish. While negotiations not strictly true.


To be sure, the TD Ameritrade Investor Movement Index, which measures the aggregate positioning of Td Ameritrade’s retail clients. They are very cautious by historical standards.



Hedge funds are a different matter. Discretionary HFs are very short the market, but systematic funds,  which are mostly trend following CTAs, are net long and have room to buy more. 



Aggregate put option open interest is highest since 2011, the date of the last debt ceiling crisis, indicating high levels of fear.



At the same time, regional banking stocks, which was at the epicenter of the last market crisis, have begun to stabilize and turn up.



I interpret these conditions as a bullish setup. Should we see a debt ceiling deal, which is highly likely, stock prices have the potential to rocket upwards on such an outcome. A debt default would obviously be catastrophic for the global system, but sentiment indicator may serve to put a soft floor on stock prices should a debt ceiling deal fail to materialize.



7 thoughts on “Ignore the noise and focus on the main event

  1. The sentiment has been extremely low for a while and has held the market up in a range inspite of many headwinds. I think everyone assumes that debt ceiling will be done and is not a big factor unless there is a default.
    The big factors are inflation and Fed’s reaction function. A pause is widely anticipated, imo.
    If unemployment remains low and core CPE remains elevated, cuts this year are not likely.
    Many moving parts but inflation is still the North Star.

  2. NVDA at the close 305.38 after earnings today 380,60.
    Rule of thumb as a trader never be long or short a stock before earning release. It is a crap shoot.

  3. They talk out of both sides of the mouth. Of course there will be some sort of agreement, even if it is a suspension and a deal to talk about it later once this inflation problem is fixed….but when there is something that says a default is not happening now, they will slam the market higher to flush out the shorts, because remember a recession is likely to arrive soon, then that smashing flush out will be called a bear market rally.
    Case in point, retail, Target Walmart beat on earnings, revs were down if adjusted for inflation, maybe earnings too, but then they say that “good news, retail has managed to work off it’s inventory glut that happened after excessive buying post stimulus checks and supply chain problems” Well, if they were working off inventory and replacing less than usual wouldn’t you expect better earnings short term? It’s like oil companies reducing CAPEX, of course earnings get a tail wind.
    Similarly the spin on put positions, is it fear or greed? The cost of buying puts is high in terms of insuring against losses, but if you think the market may tank, then you buy puts out of greed. Truth likely is that it is both, but if you have a position and you worry about it, why not just sell, let the dust settle and get back in later? Buying 2 puts at different strikes might cover your position and give a gain if things really tank, but what makes more sense is just buy a put and also sell your position, if things crash you make money, the greed and fear are always present, that’s what I think

    1. Fear and Greed are always in tension with each other. Media works nonstop to whip up either or both on any given day.
      Different demographics react differently. So goes for other segments who are directly invested.
      I use options for trading but have not been able to use them successfully for portfolio protection. Lot has to go right for options insurance to payoff.
      It’s crucial to know yourself, I think.

      1. The other thing to remember is what or how net short happens. Especially in commodities but no doubt applies to stocks. With commodities remember the commercials are of 2 kinds, producers and consumers, so as price goes up, consumers back off and hope for lower prices down the road, producers keep unloading, so things get more net short, opposite is true to some extent when price is low. So if the market is more net short, is that because there is less buying or more shorting? Likely a bit of both, but my guess is that professionals don’t chase the price like retail does.

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