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
had a 16% decline, then a 7% recovery, followed by a 12% decline, a 17% rise, and a 9% decline.
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.
Incidentally, any forex trader lamenting being caught off guard by the Japanese yen
strong rally from 24-year lows on Friday, could 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 put option buying, it is because the overall volume is higher and there is a simultaneous spike in call option buying. We therefore prefer to eliminate them, as shown in the graph 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 a mad rush for protection,” he said. concludes.
S&P 500 Futures Contracts
rose 0.9% to 4041, and US crude futures
rose 2.2% to $85.25 a barrel.
The 10-year US Treasury yield
fell 7.2 basis points to 3.251% as the weaker dollar helped Bitcoin
jumped 9.3% to $21,164 and gold
add 0.8% to $1,733 an ounce.
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 US dollar index
pulled back from new 20-year highs after traders were reminded how risky game following the movement of the currency with wild abandon can be. “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 higher
strongly to the 24-year low and gave the pound
a boost too.
has won a call on the $500 million he mistakenly sent to hedge funds as part of a Revlon loan.
Better news from Europe where the benchmark measurement of natural gas, the ICE Dutch TTF future, 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 by a week to September 22, to allow for a period of mourning.
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IHS Markit’s business PMI 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 inflation trends. “.
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 bonds to catch up with the easing of arrears?”
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