"WORKING ON OUR NIGHT MOVES"
I grew up a few blocks from Bob Seger and this song came to mind this morning when I woke up and saw another huge overnight move in the EMini SP futures. I do not have the stats handy, but a very large percentage of the total gain in the stock markets since the 6500 low has been from overnight action. In other words the net up moves during the day session have been very close to nil during this period. What does this mean?
It is my contention that the market manipulation being done is happening for the most part in the overnight sessions. It is easier to move things with less size because the volume is so much lighter, so this has been a brilliant move in my opinion. Do I have proof of this, no. However, if you just look you will see that in general, the big spike up moves in the ES have happened when bad economic reports have come out. I am not one to claim that the economy drives stocks on a short term basis, it does not directly. However, there certainly is not a complete inverse relationship either. It is my feeling that the FED's statement recently is the first step in them gradually at some point in the future admitting they have been buying stock index futures. If you look at how they have gradually been a little more open over the last year about what they are doing and why, I think this is leading at some point to a statement that might include a comment about they would consider supporting equity markets if need be.
Once they do that then they could gradually work into an after the fact admittance to having done so and be relatively clean. There has been enough increasing talk of this, and even that loudmouth Alan Grayson asking about it, well screaming about that since that is the only tone of voice he seems to have. They sidestepped his inquiry, but you can bet once it got that far, the PPT realized they needed to somehow begin to set the stage for coming clean on this at some point. What does this mean for all of us?
A couple of things. First, I think it means for the most part, we should be free of extended selloffs. Yes we will have declines, but massive amounts of money are going to come in when they start getting to the 5 to 10% level to make sure they don't go any further. As a result, I think we can be aggressive buyers on dips. There might very well be a situation where we get such a large selling panic like we did in 08 where even the PPT could not stop it, but that will take some extraneous event that will be apparent at the time and tell us to not so aggressively buy dips. Below is a graph showing the PPT trying to stop the 08 decline, they were not able too as we all now. However, look at the volume they threw at the markets to try and stop it. It was only the extraneous event of the housing bubble that overpowered them. We don't get many of those so it is doubtful another one will show up any time soon.
This is a weekly chart of the E Mini SP 500 with the COT net positions underneath. What you see here is the normal fund activity of the Large Traders in black is that they are momentum players. They buy when things go up and sell when things go down. I have marked the typical activity of these people with arrows. You can see for the most part they are in sync with the direction of the market. However, you see one atypical period where the Large Traders bought massive amounts of contracts into a major decline. Large funds sell on moves like this as you can see over and over again, yet in this case they bought record amounts, hmmm.... They continued to buy as prices plummeted. It is my contention that the only "group" large enough to lose this type of money and still be alive and kicking is the PPT. This was an attempt to stop this decline. Unfortunately for them ( US ) since it was our money that was lost, the total panic in the market and the volume it brought overpowered their efforts. This was a rare circumstance that is not likely to be repeated any time soon.
Once the market did finally stabilize, they eventually got back into their normal pattern. Since in the COT report, the PPT cannot be a commercial hedger, and certainly has larger positions than Small speculators, it is my opinion that they are classified in the Large Trader category since all open positions have to be accounted for in some manner. It would be impossible for anybody to convince me otherwise. Therefore it is pretty conclusive to me that this large increase was futures contract purchases by the US government though various entities. There is not a large or group of large commodity funds that could have lost that much money and still been in business.
The second thing that my prior assertion means is that we need to be looking to play mostly the long side from a longer term perspective. I am currently looking for a short entry from the above chart at the top, but is it a short term trade. If we get a decline, I am going to look to get more aggressively long looking for a big move up. You can see that the last 2 divergences in the momentum indicators did create reversals in the market, one down and one up. We are now getting a third one, so that is why I am looking for a short entry here. I do not suggest blindly buying or selling anything on divergences in indicators, they just get me looking in one direction. The entries into the trades are another matter and up to one's own trading techniques.