SP500 COT analysis illustrates the current negativity towards the current SP500 level.
Understanding the indicator
The Histogram illustrates the Net Dealer Position. Dealers have inventory replenishment requirements. If other market makers are sellers - they are buyers and visa versa.
The Line shows small speculators. Their goal is 'time' the market to make capital gains with no requirement to manage inventory.
Discussion
Dealers went net Long to anticipate a market fall as the Covid-19 crash materialized. They had average timing capability and remained anticipating further falls as fiscal support and market intervention drove a recovery based bull run.
In the last couple of months we have seen Dealers once again looking to build inventory with the obvious view that the market is/will be going into declines.
But are they right? The inflation inspired crash didn't occur and where is inflation?
Conclusion
The core issue from a trading perspective is to differentiate the difference between 'noise' and 'signal'
- On the negative side we have: fiscal support waning, and the debt ceiling fiasco. Growing geo-political tensions should not be ignored either!
- On the positive side there is the possibility of an infrastructure deal.
The music seems to be coming to an end!
My Trade Plan
Currently, I think contrary to fiscal stimulus we are now a 'sell on rallies' market. This is an exit long tactic.
Fiscal support ends along with growing bi-partisan politics - its a 'build shorts' market
Fiscal support continues, a bit of a rigmarole on the debt ceiling we could buy on pull backs.
VIX backwardates for whatever reason - exit longs and short
Follow-up Action
Keep an eye on:
- COT for a broad perspective
- Keep an eye Cost Basis and Realised Gains
- VIX slope
- Geo-political tensions
- US Fiscal policy (don't get distracted with monetary policy!)
Understanding the indicator
The Histogram illustrates the Net Dealer Position. Dealers have inventory replenishment requirements. If other market makers are sellers - they are buyers and visa versa.
The Line shows small speculators. Their goal is 'time' the market to make capital gains with no requirement to manage inventory.
Discussion
Dealers went net Long to anticipate a market fall as the Covid-19 crash materialized. They had average timing capability and remained anticipating further falls as fiscal support and market intervention drove a recovery based bull run.
In the last couple of months we have seen Dealers once again looking to build inventory with the obvious view that the market is/will be going into declines.
But are they right? The inflation inspired crash didn't occur and where is inflation?
Conclusion
The core issue from a trading perspective is to differentiate the difference between 'noise' and 'signal'
- On the negative side we have: fiscal support waning, and the debt ceiling fiasco. Growing geo-political tensions should not be ignored either!
- On the positive side there is the possibility of an infrastructure deal.
The music seems to be coming to an end!
My Trade Plan
Currently, I think contrary to fiscal stimulus we are now a 'sell on rallies' market. This is an exit long tactic.
Fiscal support ends along with growing bi-partisan politics - its a 'build shorts' market
Fiscal support continues, a bit of a rigmarole on the debt ceiling we could buy on pull backs.
VIX backwardates for whatever reason - exit longs and short
Follow-up Action
Keep an eye on:
- COT for a broad perspective
- Keep an eye Cost Basis and Realised Gains
- VIX slope
- Geo-political tensions
- US Fiscal policy (don't get distracted with monetary policy!)
