I was on record here as saying stocks looked good for this week, so it was not a suprise to me that we rose yesterday. What was a surprise was the magnitude of the across the board strength. I had predicted gains in metals, grain, energies and a dollar decline. All of this happened and in force. My prior view had been to play this bounce on the long side and that the larger trade would be the next move down. I am not so sure about that now, let's look at yesterday.
If we look at the main momentum/timing oscillators that I use to guage strength or weakness, they all look very strong. Before shorting into this I am going to require a rollover in these or any one of a number of other things, none of which are now on the horizon for the rest of the week. Just by how these indicators are created, I cannot foresee anything happening in just the next 3 days that would turn these bearish. The values change slower than that. I have learned by losing money doing this, not to short against these sharply rising values. They tell us we have very strong upward momentum.
It would certainly be expected to have a consolidation day within yesterday's range today and I do think that is what will happen. It is hard to make larger projections over a period of months based on what daily momentum oscillators are telling us. I have mentioned that the recent composite buying in the indexes by the commercials was bullish as a whole but might be misleading looking at the individual indexes. Below you will see again more evidence of this.
Notice how the Hybrid there in the middle once again is pegged in the buy zone, yet at the bottom when we look at the total gross long position at the bottom, a separate story shows up. In digging into this further, I have found that the pit contracts of the Naz and SP 500 is where the buying is going on, and there is actually net selling going on in the other indexes. It used to be that just the small traders traded the E Mini contracts and back then the commercial activity in them was not a good guage of what to expect going forward. The pit still had the highest volume and the large players traded that contract.
Over time with the broadening of the hours of trading and the electronic access increasing, we have seen a change. Eventually traders got tired of the terrible fills and slippage on the pit contract and gradually started trading electronically instead. Now we have transitioned into a situation where over the last couple of years, the commercials have been much more accurate in the E Mini contracts than the pit contracts. As a result I pay more attention to commercial activity there than what is going on with the pit contract. By that measure this decline is not a buying opportunity. This is why I had thought we would bounce but not by too much.
When yesterday took off on the upside it did put us in a position where now I have to see a few more days before I can make a judgement as to where we go next. I did not expect a rise of this magnitude, I had expected a more muted bounce that would setup a sell for the larger move down. That is in jeopardy at this point. I do not believe new longs should be initiated here, but it also not a shorting zone. Time to stand aside for a few days in the indexes and see what happens.
I do have some positions on, long in currencies, short in the dollar and long in the grains, that I will review over the next couple of days.