• MMM
    101.72 USD 2.71%
  • ADBE
    372.09 USD 0.22%
  • T
    16.38 USD 0.43%
  • BRKA
    501198.61 USD -1.19%
  • META
    248.34 USD 1.09%
  • NVDA
    311.79 USD -0.28%
  • NFLX
    363.05 USD -0.64%
  • AAPL
    174.22 USD -0.55%
  • AMZN
    115.02 USD -1.07%
  • MSFT
    321.21 USD 0.89%
  • TSLA
    188.89 USD 4.85%
  • SP500
    4193.05 USD 0.02%

Weekly macro report – It’s time to be a contrarian (S&P 500)

In our macro report, we monitor great extremes in negative sentiment, short-selling and option trading. Despite worsening macro, a possible rally is likely.

There are many bullish and bearish theories, and most of the arguments of either side are reliable. However, during the last week, we have monitored the absolute bearishness from almost everyone. The sentiment is extremely bearish. We also analyzed the S&P 500 (SPY) last month and revealed a bearish thesis. S&P 500 has dropped by 9-12% since then.

Now we are changing our short-term view. Partially, we’ve shown that we’ve “changed our minds” in the last week’s report, but now that many extremes have happened, we’re more sure of our thesis.

Related article: Here are 3 reasons why stocks may continue to dive

Although we are bearish in the medium term, a short-term rally could occur as there are many great contrarian indicators screaming to our team. However, we are not convinced to be bullish in the medium term as macro fundamentals can still weaken.

The market just needs the trigger

Such a trigger could be, i.e., a better than expected “inflation print” for September, whereas some inflation-leading indicators showed a strong improvement in prices. The issue is that the market has started to be very volatile, and yields rose so much in the previous week, so there are some risks. Market participants are beginning to panic, which is dangerous because a further decline is possible, but it also indicates the possibility of a short-term rally.

The S&P 500 (SPY) fell as both nominal, and real yields (orange) increased significantly. However, now it reaches great extremes in the very short term and could ease a little bit in the following days/weeks and cause a short-term reversal in the stock market. However, there is a risk of another extreme. As the S&P 500 is testing June’s low, for big players, there is an opportunity to catch the liquidity just below the June lows.

S&P 500 and real yields, Source: Investro analytics team via Tradingview

From the macro perspective, the situation is worsening, because the Fed is confident about the hiking cycle and plans to deliver further hikes to slow down inflation. It will happen, but we believe that they also wanted to deliver and let the markets know that they are really serious.

Negative sentiment is near a peak

First of all, there are four very strong reasons why we see the contrarian situation as the market does right now. Each of them is a very strong contrarian signal, which suggests the market’s short-term breath and reversal.

Read also: Special analysis on FOMC meeting

If they were placed alone, we would summarise it as a strong signal to bet on reversal, but now they are combined, thus indicating a more certain move for us. But this does not rule out that the market will not make new lows during this week, as the sentiment is very negative.

Short-sellers are very active

This great indicator, which measures the number of short-selling volume, is useful as a contrarian indicator. The 10-day average suggests that current short-positions are the highest since 03/2020 (COVID-19 panic). If these shorts closed, it would suggest a bullish rally as we saw in August. The positive sign is that there are some bullish gaps, which need to be filled, both on the QQQ (Nasdaq) or SPY (S&P 500) charts. 

SPY (S&P 500) selling volumes, Source: Investro analytics via Tradingview (FINRA)

The highest put volumes ever recorded

One of the best options tools to measure is the call-to-put ratio, or the absolute number of calls or puts. According to Bloomberg, “put volume spikes to a record amid equity losses”. This also serves as a good contrarian indicator and agrees with the logic that most shorts are opened at the end and most calls are built in the extended bullish market.

Put volumes, Source: OCC, Bloomberg

Sentiment is absolutely bearish

This bearish rally is not a rare one. But there are only 7% of stocks that are above their 20-day moving average. This indicates that in the very short-term, the market is extremely oversold. As we saw previously, it can still go lower, which would fit with the narrative about breaking to new 2022 lows, but also such levels are tradeable.

Percent of stocks above 20-day moving average, Source: Investro analytics team via Tradingview

There is a great survey (AAII), which measures the bullish, bearish, and neutral sentiment of the market in real time. In the current view, sentiment is absolutely bearish; almost every expert is bearish, and market sentiment as well. According to AAI (Bloomberg), the sentiment is the most bearish since 2008. This indicator is also contrarian in the short-to-medium term and supports a bullish thesis.

AAII Survey, Source: AAII via Bloomberg

Trading idea

As stated numerous times in the current weekly macro report aimed at the sentiment, we remain bullish on the S&P 500 in the very short term. The issue is that the market can still make new lows, which would be very logical for big players. However, it would be a good strategy to allocate to the stocks and sell the rally if possible. We don’t know what the market will do, but with current levels of VIX and bearish sentiment, the market could be very aggressive to the downside. However, we revealed many indicators which stick to our thesis.

Suggestion: Did MIT invent a new type of cheap battery?

Short-selling volumes (10-D average) are near extremes, puts are at extremes, the number of stocks above 20-D-MA is near extreme levels, and sentiment is very bearish as well. New lows are possible, but we remain bullish on the S&P 500 in the short term. 

Warning: The fully covered text is not investment or trading advice. It represents only the author’s point of view and thoughts, and we do not bear responsibility for your potential loss. The article serves only for analytical and marketing purposes.

Our Investro Analytics Team is made of financial experts and professionals who are creating content for you from all around the world. They do this by sharing their insights, ideas...


Post has no comment yet.

Want add your comment? Sign up or Sign in