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QE Correlation Does Not Imply QE Causation


The markets are much more sophisticated than the basic cause and effect analogies that constantly bombard investors.



Clearly the 1550 area is bringing out the big sellers and the buyers have exhausted a lot of ammo in order to absorb the supply. Considering the recent spike in speculator positions I believe the levered money is trying to defend this 1550 level. The question for the future direction of the market is whether they have the bullets left to take the market higher.

S&P Weekly Working Count

So here we are. In June I posited that the negative sentiment and positioning would lead to a short squeeze rally to new highs. I had mapped this move as a C wave diagonal which needed a "throw over" to complete the last leg. In this last leg the large speculators that were short at the 1265 low have been the engine behind the entire rally. They have covered and are now the longest they have been in a decade. As the market has hit these levels the volume has substantially increased and it appears the ownership has turned over from real money to levered accounts.

The true catalyst that has taken us this far has been a massive short squeeze of speculative positions which are now massively long. The confirmation bias is reaching for items such as improved economic growth, an accommodative Bank of Japan, a resolution in Cyprus, a great rotation, or whatever else they can think of to maintain their bullish position. I'm not saying the market can't go higher, but we have seen a shift from extreme bearish to extreme bullish positions. And as I've said many times before, there will be no bears left when this market tops.

Twitter: @exantefactor
No positions in stocks mentioned.
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