• Central Banks are on the verge of regaining market control

    Last week ended on an interesting note. I posted on Friday before markets open that the short positions on QLD and SPXL were an indication of the eagerness for individual traders to short the US equities using leveraged instruments. Hence, these positions would probably attract a move to generate a short squeeze.





    I hence had been expecting a shakeout followed by a shorts squeeze. We can however see on the 20DMF below that the shakeout did not materialize, but that money quickly came in and pushed all the equities markets higher.



    You will note below that the NQ8 displayed a positive Money flow during the pullback early in the day. This shows that large investors were aware of the pool of liquidity that was about to hit the markets. Let's not forget that the Fed needs to TBTF desks to execute its timely markets operations. Hence, it is not that difficult for these desks to trade their books ahead of the planned Fed operations. This has worked well in the past and will continue working, at least if the market doesn't rebel.



    The small caps were rather negative early in the day but they then were pulled higher with the rest of the market.



    You will note below that even though IBB (Biotech) displayed a negative Money Flow divergence, it nevertheless pushed higher. This indicates a conflict between sector fundamentals based investors who wanted to sell this sector and the general flow of money that was funnelled through ETFs and index instruments. Going ahead, this is a clear negative for IBB. It shows that as soon as those short squeezes will be over, sellers will come back in force.



    By the way, compared to the Tech group, the health care group looks much weaker. Is the Trump administration going to launch a major cost cutting regulatory push on the sector?





    You will also note below that in terms of Money Flow, the smallest 250 stocks of the S&P500 still underperform the largest 250. This also tells us that liquidity injections find their way mostly in the most liquid equities.



    I post below the Five days patterns for the 20DMF, the NQ8 and the small caps. All of them display a Money Flow shooting higher by the end of the day on Friday. Not typical of individual traders who are not used to buy before the weekend. It is a clear and open signal from the Fed to the market just to show who is in charge.








    Conclusions:

    Markets will never rebel. They will always move where most of the money goes, because investors are interested in making money, which is best done by following the big trends.

    On Friday, what we witnessed was the execution of a planned move for equities to test the all time highs. Baring the start of a shooting war with NK, I fully expect markets to respect this push and to test the all time highs.

    On a much longer-term view, I find it interesting to see how the Fed will be able to reduce its balance sheet while increasing US rates while still allowing the Treasury to successfully fund the growing US deficit. The Fed must pray for the rates differentials (with Japan and Europe) to keep staying high and hence must hope for easy BOJ and ECB monetary policies to continue.