Monday Night's Short-Squeezing High in the S&P 500 Futures Could Hold

The months of August and September tend to be sluggish for the S&P 500, but thus far August has outperformed historical averages. Even more impressive is the fact that gains have been forged despite the backdrop of negativity and uncertainty. This is a perfect example of how short-squeezing and fear of missing out can dominate market fundamentals. We must never forget, markets aren't priced based on the equations we learned about in finance classes, instead, they are valued according to human emotion. And as we have repetitively learned throughout history, humans are predictable in that they always bypass logic in hopes of making a quick buck. With that said, to the credit of forward-looking behavior, it has never paid to doubt the resiliency of the U.S. economy and as medical advances are made in the fight against the coronavirus, the future is beginning to look brighter. The question is, has the stock market priced the economic recovery in advance? We think it mostly has been. On another note, we have been commenting on the fact that the CFTC's (Commodity Futures Trading Commission) COT Report (Commitments of Traders) has depicted a rather large net short position held by speculators. The COT Report lags several days so we won't know for sure where speculators stand until Friday. However, given the overnight action seen in the S&P 500 futures contract, we suspect many of those short traders have covered their shorts or were forced to do so by their brokerage's margin clerks...or in extreme cases, it is possible the margin clerks themselves took the action. Keep in mind, margin calls are only issued on the close of a trading session. Therefore, if a bearish trader triggered a margin call on Monday's close, they were likely compelled to buy back shorts on the night session open to meet the margin call. This would explain last night's run to 3,450.00ish in the futures market. It was likely a classic margin call short squeeze. As long as the overnight highs hold, the bears likely have a short-term edge. While we would have suspected there would be more back and fill trade on the way up, the monthly chart has been telling us all along the likely target in the S&P 500 is somewhere between 3,500.00 and 3,600.00. In the past, we categorized such a move as irrational exuberance, and we continue to believe that is an accurate depiction. We also believe those prices will be seen. Yet, there is a reasonable chance the rally will get more difficult from here. We have noticed the VIX (volatility index) has tended to see a pivot in pricing as it approaches 20.0 to 18.00, from either direction. The VIX is has descended into the low 20.0s from a March high of over 50.0. If history has anything influence, we could be in store for a temporary spike in volatility sooner rather than later. Chart Source: QST Last night's futures market high happened to occur at the upper Bollinger Band. Rejection of this price level shifts the odds toward a short-term correction. If you are not familiar with Bollinger Bands, they are visual representations of two standard deviations of the mean. Simply put, the market tends to trade within these bands roughly 95% of the time. Denials of a trend at the price bands are generally telling. Also, for the first time since early June, the RSI (Relative Strength Index) on a daily chart has surpassed 70.0. You might recall, in early June, the E-mini S&P 500 futures contract fell roughly 300.00 points in less than four sessions before resuming the rally. This time around, we could see a similar setback prior to making way toward the longer-term target. While the June correction spanned 300.00 points, volatility has been on a path of normalization and, therefore, any correction would likely be cut short somewhere between 3,240.00 to 3,180.00, or 200.00 to 270.00 points in the S&P. In 2019 this would have been considered a market rout, but in 2020 it is merely backing and filling. The trend is obviously higher, so selling futures is a high-risk venture. Those looking to play the downside with low and limited risk might consider purchasing a September vertical put spread. Chart Source: QST *THERE IS A SUBSTANTIAL RISK OF FINANCIAL LOSS IN TRADING FUTURES AND OPTIONS.

Monday Night's Short-Squeezing High in the S&P 500 Futures Could Hold

The trend is obviously higher, so selling futures is a high-risk venture.

Columnist Conversation

Looking to Get Long Credit Here

This Weekend on Real Money

Buy the DocuSign Dip?

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.