What Are Big Money CTAs Telling Us?

1.) HEDGED – I’ve commented a number of times over the years that a market that is well-hedged tends to not be a market that gives in to chaos. I think that is true now too. You wouldn’t know that if all you did was follow the headlines. They’re telling you things are breaking down everywhere. Bear market. Risk off. Get defensive. But when you actually look under the hood, it’s a different story. New lows on the New York Stock Exchange (NYSE) aren’t expanding. They’re shrinking. Investors have possibly spent weeks, maybe months, preparing for chaos. They’ve hedged, de-risked, raised cash, and in many cases already sold what they wanted to sell. If that’s true, then what we’re left with is a market where the pressure isn’t coming from new sellers. Goldman Sachs estimates that CTAs (BIG money) sold about $190 billion in equities this month and are now net short roughly $50 billion globally. These are systematic players doing exactly what they’re programmed to do as trends weaken. But when this group gets this short, historically it hasn’t marked the start of sustained downside. It’s been much closer to the end of it. Once they’re short, the next move is buying. Right now, estimates suggest that CTAs are likely to be buyers over the next month in basically any scenario – up tape, down tape, sideways tape. Participation is acting just fine right now too. The percentage of stocks above their 200-day moving average rose. Same thing for the 50-day. Even shorter term, the percentage above the 20-day moving average surged and is nowhere near the washed-out levels from just two weeks ago.

2.) GOLD – Gold volatility (GVZ) is right back to where it was before Gold’s most recent top on January 29th. GVZ is trading above 42, which is very high. You might remember that when volatility for something gets really high, something breaks…either volatility or the price of the thing it’s tracking. In gold’s case, price broke. Gold is now 9 days in a bearish trend (downward bias) too. How it acts at $4725 will be very valuable. If it can break above that and ultimately get above $4970 and hold, it likely resumes its bullish (upward) move. If it fails in that area, then we might have another leg down like what occurred after the January 29 top.

3.) BREADTH – The cumulative advance-decline lines for both the NYSE and the S&P 500 actually moved higher. Not by much. But they didn’t fall. On a day when indexes made new lows. That’s constructive. If you want a group to watch, look at financials. Bull markets tend to only work when they are, and financials (XLF) were up over 1% yesterday when the indexes were down. That’s constructive. Even more interesting is where Financials found support. If you like math, you’d love the Fibonacci sequence! I won’t bore you with that, but 61.8% is a valuable number in the Fibonacci sequence. And where did XLF find support? Yep…61.8%. It tends to be very constructive when financials are rising while the indexes are making new lows. It’s usually good to pay attention when headlines are telling you stocks are falling apart, and the data says otherwise.