Wednesday, July 20, 2022

Morning Note: Playing Devil's Advocate...

Wow! What a rally yesterday! Clearly, investors are beginning to see blue skies ahead, right?

Well, while we're not ready to sound the all-clear right here, I will say that the latest data that instruct our views are offering up some legitimate less-bearish signaling that we need to not hastily dismiss. 

So, then, the question, was yesterday's rally any confirmation that maybe, just maybe, a bottom’s beginning to form? Did it, per se, support that "legitimate signaling" I'm hinting about? Well, frankly, by itself, nah...

Recall in our last two video snapshots me pointing to the heavy net short interest among those who speculate in SP500 futures contracts. 

Here's the latest reading:

Oof! That's betting on the downside the likes of which we haven't seen since June 2020!

And, as we've instructed many times herein, you know what happens when that kind of short interest gets caught offsides... Yep, it covers, in a hurry, big time (shorts ultimately have to buy that which they've borrowed and sold)!! And what happens when that much buying hits a market that's already gaining some upside steam? Yep, it turbocharges the rally!

FYI from the market low on June 15, 2020 (the last time traders were this net short) to the high the next day saw the SP500 jump a massive 6.33%. Open to close it was 4.38%. Yes, make no mistake, that was your textbook short-covering rally! Nine days later, by the way, the market was essentially back to even with June 15.

And, not to mention, positioning leading into this morning’s VIX options expiration was on balance bullish for yesterday’s equity session — that’s according to the options specialists whose research we now subscribe to.

My point, while we're absolutely not complaining about yesterday’s  monster rally (which may [or may not] indeed gather some steam form here), it's not a needle mover with regard to our present stance. It was, in our humble opinion, more a reflection of the positioning among futures and options traders than anything sustainably bullish.

But, that said, and as always, we remain open to all possibilities. I mean, playing devil's advocate with myself, it’s probably safe to say that sustainable upside moves from levels well below previous highs more often than not begin with the proverbial short-covering rally. 

Again, gotta keep an open mind in this business!

You won't want to miss our mid-week market snapshot later today... Where I'll have more to say about the present and go-forward setups.

Asian equities rallied overnight, with 15 of the 16 of the markets we track closing higher.

Europe, however, is struggling so far this morning, with 12 of the 19 bourses we follow trading down as I type.

US stocks are mixed to start the session: Dow down 54 points (0.17%), SP500 down 0.04%, SP500 Equal Weight up 0.08%, Nasdaq 100 up 0.21%, Nasdaq Comp up 0.24%, Russell 2000 up 0.44%.

The VIX sits at 24.48, up 0.08%.

Oil futures are down 1.59%, gold's up 0.09%, silver's up 1.82%, copper futures are up 1.71% and the ag complex (DBA) is up 0.10%.

The 10-year treasury is up (yield down) and the dollar is down 0.03%.

Among our 35 core positions (excluding options hedges, cash and short-term bond ETF), 21 -- led by uranium miners, base metals futures, silver, Disney and MP Materials  -- are in the green so far this morning. The losers are being led lower by carbon credits, energy companies, Eurozone stocks, healthcare stocks and AT&T.

Back-testing strategies and analogizing present-day economics is all good stuff to pursue, however, there's just no way around thinking (critically) on your feet:

"In economics, however, it is possible to get away from the failure of theory to play out as expected in reality. An event like the GFC occurs only once in history, and it cannot be reproduced to allow old and new theories to be tested against it. As time goes on, the event itself fades from memory. History can help sustain a memory, but economic history is taught at very few universities. Economists don’t learn from history because they’re not taught it in the first place."

Keen, Steve. The New Economics 

Have a great day!


  1. Thanks for the market updates Marty! European Commission President Ursula von der Leyen outlined a proposal for countries to cut gas demand by 15% from August until March next year. Essentially, the E.U. is trying do to ration gas ahead of "likely" cutoff by Russia.

    1. My pleasure Sam! Yeah, the European situation is messy. The latest this morning is that Putin says the pipeline will restart once maintenance is complete, although, if the "spat over sanctioned parts" isn't resolved, the flows will be smaller than the norm... He seems to be making sure not to threaten a complete shutoff at this point...

      For perspective, 74% of Russia's nat gas revenue comes from the EU... When you consider EU's overall use of nat gas, and where they source it from, Russia provides the EU with 10% of its total energy needs... Now, that 10% is absolutely a big deal, but we have to ask ourselves, who ultimately suffers the most from Russia cutting off gas to the EU.... And there are no pipelines to China and India to make up for it...