Savvy Managed Money Back in the Market This Week

Savvy Managed Money Back in the Market This Week

$DIA, $SPY, QQQ, $RUTX, $VXX

The US markets will be closed Monday for Labor Day.

Wall Street posted mixed results Friday on month end re-balancing ahead of a holiday weekend in which a fresh round of US tariffs on Chinese imports were set for levy.

The DJIA .DJI rose 37.4 pts, or 0.14%, to 26,399.65, the S&P 500 .SPX gained 1.45 pts, or 0.05%, to 2,926.03 and the NAS Comp .IXIC dropped 10.51 pts, or 0.13%, to 7,962.88.

.DXY rose 0.1% to a 2-year high.

Stock investors who have been whipsawed for most of August’s programmed trading can look forward to a reprieve now, a JPMorgan Chase & Co. (NYSE:JPM) quant analyst says.

After US Treasuries rose and the S&P 500 Index fell for 3 weeks running, the divergence left fixed portfolios 2% underweight stocks, according the bank’s head of macro quantitative and derivatives research.

“They are likely to rotate back into equities to re-balance before the month is over, and that shift could push stocks 1.5% to 2% higher“, he said.

In a week when the Key part of the yield curve inverted and recession fear sparked an equity rout, systematic strategies posted $75-B of program selling, more than 50% of which came from index option delta and gamma hedging, JPMorgan’s analysis found.

The sell off pushed hedge funds’ equity exposure to near record lows and that of trend-following and volatility-targeting funds to the 27th percentile relative to history. Such low positioning is a positive signal for stock performance.

We expect some stabilization in market volatility as dealers’ gamma positioning is now close to neutral (from a sizable Short position last week), and this may reduce volatility and marginally improve liquidity,” he said in a note to clients last Tuesday.

“Equity flows will to a large extent be driven by developments around trade, and hence the market will likely continue to be dominated by market disruptive tweets and announcements related to the trade war.

While economic and macro concerns were partly responsible for the recent market selling, they took a backseat to technicals.

More than 50% of some of the recent price action that 1st sent the S&P 500 due South then triggered a reverse and impressive rebound was convexity hedging of mortgages and variable annuities.

He echoed research of his colleagues, who last week said that convexity hedging has totaled roughly $90-M per basis-point move in bond yields since the end of last month.

Mortgages have negative convexity, and for large investors that hold them, a drop in interest rates means the duration of these portfolios goes down. This leaves the holders scrambling to compensate by adding duration to their holdings. Complex, Yes?

The US consumer is strong, and expected to remaining strong while the rest of the world slows.

The MSCI Emerging Markets Index sans Japan climbed 1.5%, a 3-week high.

Key Commodities

  • NYMEX WTI Crude Oil fell 3% to $55.04 bbl,
  • US Gold futures fell 0.3% to $1,523.78 oz

The US markets will be closed Monday for Labor Day. Investors will receive the ISM Manufacturing Index for August and Construction Spending for July Tuesday.

  • NAS Comp +20.0% YTD
  • S&P 500 +16.7% YTD
  • DJIA +13.2% YTD
  • Russell 2000 +10.9% YTD

HeffX-LTN’s overall technical analysis for the major US stock market indexes is Neutral with a Bullish bias for the week ended 30 August 2019

Have a terrific Labor Day holiday.

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Paul Ebeling

Paul A. Ebeling, polymath, excels in diverse fields of knowledge. Pattern Recognition Analyst in Equities, Commodities and Foreign Exchange and author of “The Red Roadmaster’s Technical Report” on the US Major Market Indices™, a highly regarded, weekly financial market letter, he is also a philosopher, issuing insights on a wide range of subjects to a following of over 250,000 cohorts. An international audience of opinion makers, business leaders, and global organizations recognizes Ebeling as an expert.

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