Short-term Outlook (1-5 Days):  Neutral (from 9/28 at 113.85)

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Equity Indicators - Updates and Extremes

Nasdaq 100 Commercial Hedgers

Each week, the Commodity Futures Trading Commission reports on the positions of various sizes of traders in futures contracts across all the US exchanges.

The data is separated out into Commercial Hedgers (very large traders involved in the underlying business, using futures contracts as a hedge and not speculation), Large Speculators (large traders using the futures primarily for speculative activities) and Small Speculators (everyone not included in the first two categories).

The Commission is trying to refine the data so that it more accurately reflects who is doing what, but it does contain a lot of loopholes.  Still, for many contracts is has provided valuable insight when traders become too net long or short a particular market.

For equities, the data lost much of its usefulness around 2007.  For some reason (insert your favorite excuse here), the positions started acting abnormally compared to what we'd seen in prior years, and simply didn't have much correlation to what the market did going forward.

The one exception has been trading in Nasdaq 100 (NDX) futures.  In that particular contract, tracking the net position of Commercial Hedgers has proved to be a fairly useful non-contrary indicator.  When these "smart money" traders got very net long the NDX, it usually would have paid for us to follow, and vice-versa.

Now they are massively "vice-versa".

As of last week, they were net short $7.9 billion worth of NDX contracts, an increase of $5.3 billion from just one week ago.  They are short an equal amount of large contracts and e-minis.

The previous record net short position was about $4.3 billion in mid-October 2007 and mid-December 2004.  Three other times it came close to that amount, all of which are highlighted by red arrows on the chart below.

Three months following the instances on the chart, the NDX was negative each time but once (and that gain was +0.3%).  So, obviously, it was a struggle.

The table below shows how the Nasdaq 100 performed in the months following extremes in Commercial Hedger positions, both when they were net short more than $3 billion, and when they were net long more than $3 billion.  The data goes back to 2000, but in all practicality almost all extremes occurred after 2004.

For those bullish on the market, it's pretty clear that it would be better to see the Hedgers very net long the NDX (like they were in early September) versus what we're seeing now.

I've gone over and over the data, and cannot find a data error anywhere or other reason to doubt what it is saying.  It simply seems to be one indicator that is clearly suggesting a move down for the Nasdaq 100.

Q3 Earnings Season Performance

Earnings reports for the third quarter begin rolling out "officially" on Thursday when Alcoa presents their results.

We usually try to go over some wrinkle about earnings season based on current market or sentiment conditions, though there doesn't seem to be a lot to discuss yet with our current situation.  Prices aren't at any kind of true extreme, and most of our long-term sentiment guides are kind of blah.

Just as a tease, though, the table below gives the stats based on a few different metrics, using data since 1950 for the S&P 500.  The data shows the average return and percentage of time positive for third quarter earnings season, those during a bull market, those times when the previous three months were up more than +10%, and times when the Investor's Intelligence Bull Ratio was higher than 60%.

Mostly, the numbers were fairly positive but not too far from random.  The results were pretty good if the prior three months were up strong, but we only have 6 instances over 60 years.

If the I.I. Bull Ratio was above 60%, as it is now, then earnings season wasn't too hot.  But it's worth noting that 5 of the last 6 were positive, and prior to that 9 out of 11 were negative.

If the Bull Ratio was under 60%, there was a pretty big difference.  Of those, 74% showed a positive return, averaging +2.6%.

Overall, I don't see any big edges just yet...but maybe that will change by Thursday.

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