Monday, May 7, 2012
My most recent post on the Nasdaq 100 and the Bearish Dark Cloud Cover pattern can be found here: http://scottpluschau.blogspot.com/2012/05/dark-cloud-cover-in-nasdaq-100.html
There was a nice gap down in the Nasdaq 100 on Sunday night. A potential "Breakaway Gap", which would bring some pain to those with a large losing long position trapped above the gap.
The legacy Commitments of Traders report is what I look at first and foremost. But when it comes to equities, I also review the "Traders in Financial Futures" report. There is something very interesting about Nasdaq 100 report lately and I will take some time to expand on it and ask some thought-provoking questions for you readers. Feel free to comment publicly or email me afterward.
Let me begin with some details of the "TFF" report which can be found on the Commodity Futures Trading Commission website. Rather than the "Reportable" or "Large Trader" category of the legacy COT report being broken down into "Non-Commercial" and "Commercial", the "TFF" report breaks down the large traders into "Dealer Intermediary", "Asset Manager/Institutional", "Leveraged Funds", and "Other Reportables". Both reports have an identical "Non-Reportable" category. I cover the legacy COT report in more detail in the tab at the top of the blog.
What do these categories in the TFF report mean? According to the CFTC website:
The dealer intermediary represents "Sell Side" participants. These include large banks (U.S. and non-U.S.) and dealers in securities, swaps and other derivatives. Typically, these are dealers and intermediaries that earn commissions on selling financial products, capturing bid/offer spreads and otherwise accommodating clients.
The remaining three categories (asset manager/institutional, leveraged funds, and other reportables) represent buy-side participants. These are essentially clients of the sell side participants who use the markets to invest, hedge, manage risk, speculate or change the term structure of duration of their assets.
The asset manager/institutional are classified as institutional investors, including pension funds, endowments, insurance companies, mutual funds and those portfolio/managers whose clients are predominantly institutional.
Leveraged funds are typically hedge funds and various types of money managers, including registered commodity trading advisors; registered commodity pool operators or unregistered funds identified by the CFTC. The traders may be engaged in managing and conducting proprietary futures trading and trading on behalf of speculative clients.
The other reportables are mostly traders using markets to hedge business risk. They include corporate treasuries, central banks, smaller banks, mortgage originators, credit unions and any other reportable trader not assigned to the other three categories.
With that being said, let's dig in shall we? The most recent Nasdaq 100 consolidated TFF report shows the dealer intermediaries are long 6,021 contracts and short 50,670 contracts which is an 8-1 NET short position. The consolidated report is 100X the index, which means each contract is a $260,000 position if the index is priced at 2,600.
Do you think this "eye-opening" collective NET short position got built primarily from "capturing bid/offer spreads"? It is my understanding that "sell side" in the financial industry includes "advisory functions" and "research". Are they sharing the information of extreme risk of bearish price action to the Nasdaq 100 to their clients? If so, what are these clients on the "Buy Side" paying them for if they don't listen to the advice? Do those on the "Buy Side" even look at the TFF report? Is the sell side analysis built upon the Fed putting a floor under the market with another round of "QE"?
I believe Goldman Sachs and Morgan Stanley would be considered "sell side" firms. Who does the Fed work for? Do you think it is possible for a "downgrade" to happen to this sector from the "sell side" in the near future? Could the sell side be heavily betting against their clients before the markets moves lower in order to bang the register for a nice yearend bonus on top of the already hard earned "fees and commissions"? That large collective NET position from the dealer intermediaries brings me a whole new appreciation for the word "sell" in "sell side" when I do the math of that short position. Just some food for thought.
On a quick side note, if you are a small speculator in financial futures, besides the good idea of knowing yourself, I believe it would be a very good idea to know your competition.
The bottom line is I do not care about conspiracies, or manipulators, I care about objectively analyzing the futures market, which includes a complete picture of the auction.
Lastly, if the markets start to pick up a head of steam to the downside and the Fed does "bail" out the markets, it will be reflected in the study of the auction. If I am caught on the short side of a trade suddenly, proper risk management will be there.
One quick look at the chart this morning shows the bulls attempting to fill the gap. So far this resembles a bullish "Hammer" reversal candlestick on the daily chart, but it is before the big volume will be coming in today. A failure to fill the gap by 10AM EST will have me looking to sell. A new low after 10AM EST without a gap fill might have me looking to sell. The bottom return line, around 2,555, may become a secondary target for any trailers left on pricing patterns that developed in the smaller degree timeframes.
I will be here at my desk all week entirely focused on the auction of the futures markets, but I may take some time off from writing on the blog this week. Updates via email will go out to those on my list.
(Click on chart to expand)
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Source: http://scottpluschau.blogspot.ca/2012/05/weekend-update-nasdaq-100.html
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