Dow finishes the week slightly higher, CoT speculators heavy sell

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When it comes to the economic data from late last week, preliminary manufacturing and services PMIs (Purchasing Managers Index) generally beat estimates.

In the US, the focus was on improvement and durables as they contracted by a larger 2.2%; unemployment claims dropped to a low unseen since 1969 at 187K and pending home sales contracted again for the fourth month in a row. It may be a theme moving forward with mortgage rate hikes, shortages, and pricing impacting housing affordability as the UoM’s consumer sentiment was revised to a lower 59.5 with inflation expectations at 5.4%.

The stock market has remained relatively resilient despite the bond market selloff (VIX-MOVE divergence increases) and theUS Treasury yields finishing the week higher across the curve. In real terms, they were higher for all but still in negative territory save for the 30Y, the spreads negative for the 10Y against the 7Y, 5Y, and 3Y while against the closely watched 2Y positive but below 20 basis points.

The market pricing of the Federal Reserve rate hikes was still a majority at 50bp for May and a majority of 2.5-2.75% by the end of the year. Breakeven inflation rates were at nearly 3.6% for the 5-year while not far off 3% for the 10-year.

When it comes to the week ahead, central bank decisions are absent amongst the majors, leaving it to speeches from some members. As for economic data out of the US, two key items to watch for is this Thursday’s core PCE (Personal Consumption Expenditures) price index. With expectations, we’ll see month-on-month growth of 0.4% and year-on-year at 5.1% (and overall at 6.7%).

The other item of importance is this Friday’s Non-Farm Payrolls where expectations are for an increase of 450K for March, and where the unemployment rate is expected to drop a notch to 3.7% with monthly wage growth at 0.4%.

Leading up to it, we’ve got job openings out of the Bureau of Labor Statics tomorrow with estimates pointing to an ongoing gap above 11m, ADP’s (Automatic Data Processing) non-farm the day after (its estimate sizably below last time around), and the usual weekly Thursday unemployment claims.

Look out for trade and wholesale inventories tonight, house pricing data on Tuesday, GDP (Gross Domestic Product) on Wednesday, and manufacturing PMIs out of both Markit and ISM on Friday. On the fiscal policy front, we’re expecting the announcement of the “Billionaires Minimum Income Tax” that’ll target households worth more than $100m with a 20% minimum tax rate on all income including unrealized investment income.

Dow technical analysis, overview, strategies, and levels

Volatility has been dropping and this means a lack of a play from a weekly time frame standpoint. While it took two sessions to get a move past last Thursday's 1st Resistance level, settling above it by the close giving conformist buy-breakouts (where the overview there is 'consolidation - volatile' on the daily time frame), there is a slight edge though lacking follow-through.

The technical overview needs little to shift in both time frames and should volatility remain low, it would make it reversal vs. breakout instead of buy vs. sell in terms of conformist and contrarian strategies.

IG client* and CoT** sentiment for the Dow

CoT speculators remain the majority short here, but with longs dropping by 2,246 lots outdoing an 878 lot drop in shorts. It has moved into heavy sell territory at 70% and CoT S&P has shifted to slight sell 54%; Russell heavy sell 65% and Nasdaq about to shift.

For retail traders, after briefly shifting to slight buy in the middle of last week, they’re back in majority short territory starting this week off not far from where they started last week. They aren't alone, however, as its majority short retail trader bias for all six indices (S&P 55%, Dow 63%, Nasdaq 51%, FTSE 70%, DAX 56%, and highest for the ASX at 72%).

Dow chart with retail and institutional sentiment

*The percentage of IG client accounts with positions in this market that are currently long or short. Calculated to the nearest 1%, as of today morning 8am for the outer circle. Inner circle is from the previous trading day.

**CoT sentiment taken from the CFTC’s Commitment of Traders report, outer circle is latest report released on Friday with the positions as of last Tuesday, inner circle from the report prior.