Sunday, February 7, 2016

US Stock Market Looks Like Oversold But Investors Must Decide How They Look At The Market In The Long-Term

After the last fall, the US stock market is looking like oversold in the short-term.

Firstly, less players are interested in taking part in the game, no matter whether on the long or the short side of the game.

The chart below shows the decreasing open interest in VIX futures - open interest went down from around 450,000 contracts in June 2014 to 250,000 contracts these days:

What is more, now the speculators hold quite large long positions in VIX futures (green arrow) - in other words they bet on the US stock market going lower. Most recently such an occurrence meant that the market was oversold in the short-term: (red arrows):

The question is - is it a good buying opportunity? In my opinion there are two answers:

  • if you think that US stocks are still in their uptrend or they are in a topping pattern - the answer is "Yes"
  • if you think that US stocks started a bear market - the answer is "No"

For those thinking that a new bear market has started - please, look at the chart below:

The chart shows net positions held by big speculators in S&P futures. The blue arrow indicates that in the short-term the market is oversold. However, in the long-term there is a lot of room to go lower. The red arrow shows that in the middle of 2011, during the last big correction in the bull market, big speculators were holding much bigger net short positions than today (108 thousand contracts versus 45 thousand today).

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