After a near correction of 10% in the U.S. equity market, many traders hid behind their chairs as volatility had one of its largest multi-day advances in the last several years. While the cause of the downturn, whether it be the Ebola scare, ISIS, the end of QE, orĀ the fact that the Royals arenāt playing as well as they should be, is irreverent in my opinion, but itās interesting to note who may have been buying the dip.
In a recent Market Masters post I wrote forĀ See It Market, I discussed using Commitment of Traders (COT) data as a tool to seek out turning points in variesĀ markets. COT data is like a footprint left by buyers and sellers in the futures and options market. Luckily those footprints get categorizedĀ by the type of trader that left it. Below is a chart of the S&P 500 along with its corresponding COT net-positions in the bottom panel.
The red line represents Commercial Traders, who are large institutions and are often considered the āsmart money.ā Itās not very often we see this trader group become net-long the equity futures markets. However, when they do get close to being or do become net-long, a bottom is often put in for the market. Last week we saw an example of this as markets were falling the Commercial Traders increased their position pushing it nearly to being net-long.
Another instanceĀ of institutions adding to their positionsĀ can be seen for the Dow. Commercial Traders became net-long as they followed Buffettās mantra of buying when thereās blood in the streets. The increase in volatility appears to have opened that door for institutional traders as they have continued to stay aggressiveĀ as they have been buying the dips and going net-long at each dipĀ so far this year.
What will be telling going forward is if we do not see equities continue to rally and the market moves against the āsmart money.ā Do they keeping buying or does the wave of selling overpower them to keep stock prices elevated? Ā This is something Iāll be watching as we get a new set of data at the end of each week.
Photo courtesy ofĀ Miguel Angel GarĆn
Disclaimer: Do not construe anything written here as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in this post.
Copyright Ā© Andrew Thrasher
