Yellen Dip Bought, Bulls Buoyed By Fed’s Focus On Labor Market

Equity bulls used the Yellen dip last Tuesday as an opportunity to add to risk, not reduce. The Fed is making sure liquidity remains plentiful, and the short end of the yield curve is cooperative. In this environment, VIX on Friday breached short-term trend line support (VIX).

The mini selloff last Tuesday caused by Treasury Secretary Janet Yellen’s interest rate comments was used as an opportunity to buy. Yellen said at an event that “it may be that interest rates will have to rise somewhat to make sure that our economy doesn’t overheat.”

The immediate reaction in the equity market was to shoot first and ask questions later. The S&P 500 large cap index dropped 0.7 percent and was down 1.5 percent at the session lows. The Nasdaq 100 was down 1.8 percent and was down as much as 2.9 percent.

On the S&P 500 (4232.60), bulls defended short-term horizontal support at 4120s and by Friday rallied the large cap index to a new high. No such luxury for the Nasdaq 100, but it also defended important support on Tuesday. It gapped lower, with the session low of 13396.11 finding support at a confluence of four-month horizontal support and two-month rising trend line. To boot, the 50-day is at 13365.48 (SPX).

The tech-heavy index (13719.63) rallied off of the triple support but not enough to take out 13840s. On Thursday, Tuesday’s low was again defended before rallying. This was then followed by Friday’s 0.8-percent rise which filled Tuesday’s gap, although sellers showed up at the highs, ending the session with a long-legged doji.

The Nasdaq 100 already breached a rising trend line from the low of March last year, the underside of which is now repelling rally attempts (Chart 1) (NDX).

It is possible shorts got active post-Yellen comments. It is also possible they covered as the week progressed.

As of last Tuesday, non-commercials’ net shorts in Nasdaq 100 index (mini) futures stood at 16,803 contracts, up 9,045 week-over-week. They also raised their net shorts in Russell 2000 mini-index futures from 20,172 to 23,065 contracts (more on this here). In fact, in e-mini S&P 500 futures, they switched from net long 2,284 to net short 33,815 contracts (Chart 2) (IWM).

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