Originally published by AxiTrader
Key Takeaway
The Dow Jones Industrial Average closed at another fresh record high last night while the S&P 500 and Nasdaq 100 were mildly in the red. Those moves were despite the fact that the minutes from the most recent FOMC meeting suggested the US central bank is on track to raise rates again soon.
But even as US and global stocks hit and sit near record highs a new report out overnight suggests that some hedge funds have gone cold on the Trumponomics rally and have called time on the rise.
The result is a growing level of shorts in the market.
What You Need To Know
The Dow Jones Industrial index crossed 20,000 for the first time earlier this month and is closing in on 21,000 already ending trade in New York this morning at a fresh record of 20,775.
That's nine straight days of higher closes which, according to a US-based strategist I follow, is the first such run since January 1987.
Twitter Screenshot
That's not to run an analogue between 1987 and today. It's just a statistic.
But as a behavioural finance and economics guy when folks are starting to think and talk like this it does aware me that there could be a subtle shift in market thinking as the Trump rally has now exceeded most US equity market strategists guesstimates of where US stocks would end 2017.
And it's only February.
It was with that in mind that I stumbled upon a Reuters story this morning covering a report from FIS' Astec Analytics which showed that:
"The level of shorts - a bet that a stock will fall - taken out against the Dow Jones Industrial Average (DJIA) .DJI jumped 13 percent in the 30 days to Feb. 20, while shorts against Europe's STOXX 600 rose 18 percent over the same period."
What's behind this shift in positioning appears to be both some skepticism of what the real impact of Trumponomics will be on the US economy, and especially the Fed, and also a concern from some hedge funds that all the positives are baked into the cake.
That's becoming a familiar theme in my writing this week.
Reuters reported that Shannon McConaghy, a portfolio manager at London-based Horseman Capital said, "the Trump rally – in my opinion – saw global markets price in a huge amount of hope around his campaign promises, while ignoring the knock-on risks to fragile economies like Japan that export to the U.S.".
As I've highlighted before the Trump rally is also really the global reflation rally more than anything. All that president Trump's rally has really done is give investors the opportunity to believe the more positive data flow in the past 6 months is both real and sticky.
Citibank G10 and Emerging Markets Economic Surprise Indexes - both have been very strong in recent months
But just because a few hedge funds are increasing their bets on the short side of the market in the belief a correction is going to happen doesn't mean that stocks can't continue to rally. Indeed many investors are focussed on next week's address by president Trump to the US Congress as a potential reignition point to the next leg of this rally.
That's because he is expected to unveil the tax package that so much of the US business sector - and by extension the markets - have been waiting for.
So hedge fund selling and bearishness is just a warning.
Which brings me to the chart I've been watching on the S&P 500. I use the S&P rather than the Dow both because of the way it is constructed and calculated and also because with 500 stocks it has a broader coverage of the US economy than the 30 stock Dow.
As I have noted recently the S&P is approaching what could end up being an important level of overhead resistance.
Again it's no certainty that the hedge funds are right, or that the market will pull up. But often the simplest approaches in trading are the best. And if I'm looking at this line there is a fair chance that many others are too.
There are also concerns about the elevated PE levels for US stocks in many quarters.
But I'm always reminded of the oft-quoted saying that the markets can stay irrational longer than I can stay solvent. That's not to say I think this rally is irrational, the better data prints across the global economy suggests it is not.
Rather it is to highlight that there is often no place for rhetorical positions in trading. That's a stance - follow the price - that kept in the 2011-2015 stock rally until it finally broke lower. But it's also why I've had my eye on this overhead trendline resistance from that 2011-2015 rally.
So the stock market rally remains intact for now. But it seems there are a growing number of traders and investors, specifically hedge funds, who think it's time for a rest.
Time, as they say, will tell.
Have a great day's trading.