Digression between technicals and fundamentals | Greg Canavan

Here's an excerpt from Greg Canavan's latest piece for The Insider. *** A quick follow up on last week’s Insider. I posed the question: Will the short squeeze push markets higher? I reasoned that the recent sharp rally on the back of better-than-expected US inflation numbers was likely driven by short covering. Well, I was wrong…. Traders’ speculative net short positioning in the S&P 500 peaked at 434,000 contracts on 30 May (and reported on 2 June). By 4 July, shorts had covered more than half of that position to 207,000 contracts. It was my contention that this short covering would continue. But it didn’t…I was wrong! The latest release, which reports on positioning as at 18 July, saw net speculative shorts jumping to 263,700 contracts. Now, one data point in isolation doesn’t mean much. But the fact that the short sellers aren’t continuing to cover as the market goes higher suggests there may be more fuel in the tank. After all, the US market has certainly built up a head of steam over the past few months. The CNN Fear and Greed Index is STILL in ‘extreme greed’ mode, and has been since early June. The narrative is now coming around to ‘there won’t be a US recession’, and investor sentiment is surging. Here’s an excerpt from the latest AAII Sentiment Survey: ‘Bullish sentiment — expectations that stock prices will rise over the next six months — jumped 10.4 percentage points to 51.4%. This marks the seventh consecutive week that bullish sentiment is above its historical average of 37.5%. This has been the longest above-average streak since a 13-week stretch from February to May 2021. Bullish sentiment was last higher on April 22, 2021 (52.7%) and is currently at an unusually high level. ‘Bearish sentiment — expectations that stock prices will fall over the next six months — decreased 4.4 percentage points to 21.5%. At seven consecutive weeks, this is the longest pessimism has been below average since a 23-week streak from February to July 2021. Bearish sentiment is at its lowest level since June 10, 2021 (20.7%) and is nearing the bottom of its typical range. ‘The bull-bear spread (bullish minus bearish sentiment) shot up 14.7 percentage points to 29.9%. The bull-bear spread has reached an unusually high level.’ Increasingly bullish sentiment and short sellers increasing their bets is a potent combination. It paints a very murky short-term picture.

By Kiryll Prakapenka

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Digression between technicals and fundamentals | Greg Canavan

By Kiryll Prakapenka

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