Alright you degenerates...
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If you’re returning for these weekly posts, you’re ahead of 95% of other traders. During sideways markets like the current one, most players will tap out entirely and stop paying attention to critical indicators. Sure, taking a few days off from the market never killed anyone. But one major event is all it takes to shake up the backdrop and drastically alter sentiment. While the market hasn’t seen a vicious squeeze lately, the slow grind higher has made bulls cocky; this is best reflected in the CNN Fear/Greed Indicator. The indicator closed last week at 67, falling in the “Greed” category just below “Extreme Greed.” In addition, there’s been an aggressive selloff in the VIX, suggesting that investors are getting complacent and neglecting the risk of an exogenous event.
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CTA positioning still supports the bullish narrative, with CTAs transitioning from a flat position to a net long in the last few weeks. When CTAs start buying equities, they activate a positive feedback loop. CTAs will buy as the market rallies since they are naturally trend followers. Thus, CTAs will push the market even higher, intensifying the rally. Therefore, CTAs provide a “cushion” in an up-trending market that experiences a brief pullback. This enables bulls to buy dips with extra confidence since the probability of a bounce is higher. On the other hand, hedge funds puked up significant exposure in the S&P 500, bringing them from net long to net short overall. Simultaneously, they increased their gold exposure, suggesting they’re bracing themselves for a correction and playing scared. With Hedge Funds known to be a contrarian indicator, the bulls should take solace in the fact that Hedge Funds are running scared.
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Sweeper activity remains a ghost town. While short-term sentiment indicators may lead you to believe everyone’s aggressively bullish, these short-term signals don’t reflect the smart money’s lack of conviction. Yes, players are taking risks in the short term and betting on a squeeze, but don't confuse this with long-term accumulation. For example, after the 2018 “flash crash,” sweepers were consistently launching million dollars bets left and right with conviction. Until we see something similar to that action, don’t get your hopes up on a rally to new highs.