Wave Of Confidence Has Everyone Going In The Wrong Direction

 The SPX500 has been rallying into a topping formation.  This ‘counter-trend’ rally is the corrective action that is necessary to finish off this Primary Wave 2 upwards within the stock market topping phase.

This cycle top will ‘flip’ and then the start of the next move down will begin in US large-cap equities. I should mention that the equity market is still holding up currently - and there is a potential for one more push up to ‘nominal’ new highs to create a final ‘short squeeze’ before collapsing.

My current mindset has been to go into the markets for as little as 48 hours, and then exit with a nice handsome profit using a strategy known as Price Spikes.  This has worked out very well this year, capturing very quick profits from these special “price spikes’.  It’s a simple “Get-In & Get-Out” strategy for highly volatile markets.

This rally in stock prices, also called the ‘Janet Yellen Rally’, has everyone feeling good about stocks and the economy again. But it’s now coming to an end and I am looking to sell into ‘nominal’ new highs going forward.

Bullish Percent Index

This is a useful indicator when used in conjunction with other short-term momentum indicators -- and seasonality because it eliminates much of the “noise”.

The stock market started off the first quarter of 2016 with its worst period in 80 years. It was during that period of time that the market experienced a drop of 10% and then regained 10%. We are living in volatile times and will most likely continue to do so as US elections near.

Statistically speaking, the markets will probably slow down after April 30th^th.  Subsequently, in May of this year, I expect to see (based on seasonality analysis) the beginning of a terrible six months for the stock market.

The SPX500 has been moving upwards with fewer and fewer participants - fewer stocks supporting the rally, and fewer buyers (volume). Moreover, the main momentum oscillators are currently rolling over. Consequently, I consider this to be ‘extremely’ bearish.  The momentum of the stock market is now changing direction!

What Does All This Mean?

The stock markets have been trading higher for seven years, thanks to the FED increasing liquidity. This has led to relentless bold purchases during equity market declines over the last several years.  However, with certainty and confidence, I believe this is finally coming to an end. 

The stock markets love ‘certainty’.  The Fed’s support has been fairly certain for several years. The ‘commercial traders’, which are considered the smart money, are clearly losing faith in their ‘collective’ ability to lean on the FED.  The ‘Net Commercial Positon’ is still within normal range; however, the ‘total position’ is flashing a major warning sign!

The ‘total position’ measures the total number of contracts outstanding in a given trader category.  It is very similar to ‘Open Interest’.  The ‘Commercial Trader’s position is one of the smallest in years for the SPX500 and the Dow Jones indices.  The lack of ‘Commercial Trader’ interest at these prices, which are at near all-time highs, suggests that we will not be staying here very long.   Therefore, given their financial capacity and their impact on market prices, there should be a ‘substantial’ market drop.

Historically speaking, small total ‘Commercial Trader positions’ have correlated with falling prices.  Considering that the ‘Commercial Traders’ have yet to surpass their ‘long position’ total on the rally off of the October 2015 lows, I believe that their next action will occur from the selling side.  I expect them to wait for ‘nominal’ new highs in order to commence their selling, which usually is how they do things.

In Conclusion

The Commercials are preparing to position themselves to profit from a falling stock market. When they do things like this just as the stock market is making multi-month new highs, it’s a clear warning sign of what is likely to happen. I think it’s safe to say they are bearish and will start selling large amounts of shares to the average market participant over the next few months, which in turn will fuel the stock market lower.

Rest assured the coming stock and commodity market gyrations are about to shock investors!