Three Downside Warning Signs
Doesn't the market always go up in December?
Heading into this week, though, there are a few warning signs popping up that make me think it's going to be skewed to the downside.
1. Reaction to the Nonfarm Payroll Report
Of the 10 times since 2000 that the S&P has gapped up +1% on NFP day, only one time did it close the next week in positive territory, and overall its average return was -2.1%. We also have negative seasonality for the coming week (negative seasonality? In December? Gasp!). From the fourth through tenth trading days of December, the S&P has managed a gain only 43% of the time since 1928.
2. "Smart Money" Selling TechSpeculators continue to like the Nasdaq 100. Really, really like it.
The chart below shows commercial hedger positions in Nasdaq 100 futures, but by definition, large and small speculators are taking the other side of the trade. The bottom like is that "smart money" hedgers are net short to one of the most extreme degrees in the history of this data (going back to 2000).
The other three weeks highlighted on the chart are 12/01/04, 12/05/05 and 10/15/07.
3. "Dumb money" Buying Stocks
The latest weekly data from the options markets shows that the smallest of traders -- those trading 10 contracts or less at a time -- have remained quite bullish for the past two weeks.
This is the first time since the March low that we've seen two consecutive weeks with such an extreme ratio. The other four times the ratio below hit its upper red trading band, the S&P 500 was about to enter a short-term correction.
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