Positioning, Environment, and Zeitgeist

 The short term stock trading game is mainly affected by positioning, the current market environment, and the prevailing zeitgeist.  Let's go into each factor one by one.  

Positioning

The are a few good sources for this, but the main ones that I like to look at is CFTC Commitments of Traders data and put/call volumes and current gamma exposure.  Here is the latest COT data for S&P 500 futures and Nasdaq 100 futures:

 S&P 500

Nasdaq 100

The main group to follow are the asset managers.  Big net long positions for asset managers usually means that institutions are positioned heavily long, and vice versa for small net long or net short positions.  Right now, asset manager longs in SPX futures is moderately long, not yet extreme.  Same goes for Nasdaq 100.  Last week took a big bite out of Nasdaq 100 long positioning.  

Given the price action, positioning is about neutral, so no signal from this.  

Put/call ratios were very low througout August but have risen signficantly since September 3.  Not yet at extreme levels but the CBOE put/call ratio was at 0.83 on Friday, high enough to show signs of caution and give a moderate reversal signal.  

Slight bullish factor.

Current Market Environment

Its a strong uptrend.  Rising 50 day and 200 day moving averages for both SPX and NDX.  Blasted through to a new all time high earlier this month, and despite a big pullback, still too early to say that momentum favors bears.  The pullback cooled down ebullient sentiment towards stocks, and we are closer to strong support levels at 3230 and 3300. 

Bullish factor. 

Zeitgeist

Investors still have a total and complete faith in the Fed to do whatever it takes to keep asset prices high, will keep doing QE and may expand their program if stocks go into a downtrending phase.  Still strong belief that there will be lots more fiscal stimulus regardless of what happens in the upcoming election.  Definitely some complacency and bubble type behavior looking at the phase shift lower in day to day put/call ratios and volumes.  Retail traders are believers in stocks again.  This probably keeps a bid underneath the market until economy strengthens enough to make further  fiscal/monetary stimulus unlikely.  This looks like a growing bubble environment reminiscent of 1999.  

However, a huge event with lots of uncertainty in the November election will keep sentiment subdued and will probably cap the upside.  This will become a bigger and bigger factor as we get closer to the election.  Peak election angst will probably be during October.

Neutral factor now.  Bearish factor in October.

We have the FOMC meeting on Wednesday, which is the big event of the week, and then triple witching expirations on Friday.   Usual pattern is to rally into FOMC meeting, and selloff a bit afterwards, but with futures and options expiration on Friday, that is usually a bullish force on the market.  

Play the range, as market consolidates the big up move over the past 6 months, and with lots of resistance at these lofty levels.  Upside is probably capped at 3450-3470, and downside until end of month is probably capped at 3300-3320.