EC About That "Retest" Thing...

Last week, we reviewed Marko Kolanovic's research showing the positioning of hedge funds and systematic traders. The bottom line here is the equity exposure of these managers continues to be at very low levels relative to history. But with the stock market indices a chip shot away from all-time highs, the question is why are these traders so underexposed to the big rebound in stocks?

Based on the relentless rise in the major stock market indices, another question worth pondering is why trading volume has become so thin lately. According to the WSJ, only 6.2 billion shares traded hands daily last week on the Nasdaq and NYSE, which is the lowest weekly average seen in more than seven months.

Some argue that investor anxiety is to blame on both fronts. Uncertainty about a tenuous economic backdrop, trade talks, earnings, mutual fund outflows, and the political landscape could be causing some angst - and keeping investors from chasing the current run for the roses.

A third reason that investors may be exhibiting some caution here is the current state of the charts. In short, after a very rare and very perfect "V" bottom, the major indices are now bumping into what technicians tell us will be an important (as in, very important) resistance zone. As such, we should expect, at the very least, a pause in the action as traders "test" this area of resistance.

S&P 500 - Weekly

(Click on image to enlarge)

But hasn't it been the "expectations" of what will come next in Ms. Market's game that is really behind the hedgies being on the wrong side of the trade? Hasn't it been "prudent" to be cautious since December 24th? And hasn't the market made a mockery of both ideas for the past 4 months - and past 560 S&P points?

The "Retest" Was A Lock

Lest we forget, when markets fall 20% in short order there is usually a reason. In this case, it was the triumvirate of slowing global growth and fears of policy missteps by both the Fed (raising rates too far) and the administration (engaging in a prolonged trade war) that caused traders to hit the sell button early and often in the fourth quarter of last year.

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Disclosure: At the time of publication, Mr. Moenning held long positions in the following securities mentioned: none - Note that positions may change at any time.

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