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A short market analysis as of 26.1.2020

Fiala Petr
Published: 27.1.2020 | Last modification: 27.1.2020 08:10  | Comments: none
I have another brief analysis of the capital markets. I will only focus on the most significant development.

Weekly performance: SPY -1%, QQQ -0.3%. The XLF, XLY, and XLV sectors now look downward. But defensive XLU and IYR (REITs) are still growing. Technological QQQ is still the strongest ETF. This graph also shows that QQQ is very strong. Certainly, the uptrend does not end. Each correction is going to be purchased.



HYG- high yield corporate bonds - uptrend so far. The price has strong moving averages under it. So far there are no negative divergences. As long as HYG is growing, stock price growth is healthy and sustainable.



Security lending, short-term chart - as you already know, Finecharts does not download stock price data at the moment. The arrows show ETF SPY  in the top graph. Security lending is one of the ways the US central bank ensures liquidity in the market. The theory says market participants borrow government bonds at the moment they want to speculate on their price decline (for a variety of reasons) but do not own them. When the demand for bond loans increases, the price of lending on the market is rising.  And at that moment, the Fed is here to get down borrowing rates for US Treasury securities by borrowing securities from the SOMA account and accepting other securities as collateral. All this means one more thing: the increase in shorting of bonds means a rise in borrowing rates and the growing demand of primary dealers for lending. This situation may be related to the fact that the mood on the stock markets is rosy, and stocks are preferred by investors, unlike bonds whose prices fall (risk-on situation). The falling price of bonds results in an increasing number of speculators (typically funds) speculating on further price declines. In general, we can assume that Security Lending increases market liquidity and thus contributes to the rise in asset prices.  Lending declines when market participants are not interested in shorting Treasuries. That means they expect price increases and a drop in yields). This, in particular, after a long rise in the prices of risky assets, may signal that the risk of a market correction is imminent.

The relationship between security lending and ETF SPY (S&P 500 stock index) is clear. When lending increases, so does SPY. As soon as lending begins to decline, the price of stock indices finally follows. The decline in lending in overbought situations of equity indices (speculators are fully in stock) points to the predictive value of this indicator. Right now, the market is heavily overbought and lending has actually fallen. I would expect some decline in stock prices too.


US Dollar (UUP), SPY, Net SHORT primary dealer (investment bank) positions for Eurodollar (center) and net short positions for 10Y Treasury. Today´s situation is typical for price peaks in risk-on assets. US Dollar is at maximum, ETF SPY too, Net shorts for ED are at maximum (slightly declined since September), net shorts for bonds are in the upper half. But such a situation can persist for a more extended period. I suppose until the elections in the USA in November. However, we can expect minor corrections of the risk-on assets in the future.


The long-term relationship between lending and SPY prices clearly shows that security lending is indeed a leading indicator for SPY. Security lending is now at historic highs. The Fed fosters maximum speculation by continuously ensuring market liquidity. So far, even here, one cannot think of anything changing.



Net SHORTs of commercials (banks) for stock indices - ES and NQ ( futures contracts). Net SHORT means SHORT minus LONG positions ( COT reports). Banks are on the right side of the market at crucial times. Speculators (funds) on the wrong side. It stems from the division of roles in the market. As prices rise, speculators are following the trend and are increasing their LONG positions in risk assets. These are usually at their peaks when stock indices peak. Banks do the opposite. They buy shares from speculators at a time of slump. Banks as market makers earn money from the spread. When the correction ends, banks start profiting from price increase. They bought cheap and now wait for prices to rise.

In this moment, bank positions are not yet in extremes. It is not a typical situation for significant dips. We have already seen the net shorts chart for ED. In this respect, the positions are very stretched, and there is a high demand for US Dollars in the world. Therefore, banks are betting on rising interest rates on dollar deposits.



Conclusion: We are in the BULL market, which is likely to persist. Wait for dips in markets and keep buying.


Petr Fiala














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