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.