‘Traders will want to take some money off the table’

From Scott Garliss at the Stansberry NewsWire:

The quarter ends tomorrow for most fund managers…

Traders will want to take some money off the table. It doesn’t mean they completely unwind positions, but it’s never a bad idea to hedge your bets. A lot of that happened today. Hedge fund portfolio managers and traders don’t want to stick around ahead of a long weekend. They likely show up for a half day tomorrow, if at all.

If you’re a long positions only portfolio manager, you likely wait until tomorrow to defend names you own. Why waste the bullet too soon? It’s easier to get momentum in your favor if the people you’re sparring with in the market place have all gone home for the weekend.

That implies a skinny market tomorrow afternoon in terms of liquidity. With everyone gone, it’s easier for stocks to gap more one way or the other. Granted, quarter-end isn’t as important as year-end… But people still care. They’ll want to breathe a sigh of relief after the crazy couple of months we’ve experienced.

The big trades I want to keep an eye are the record short interest in the dollar and bonds.

The short dollar versus long yen has been a favorite pairs trade for hedge funds and currency traders. The yen has had a big move higher versus the dollar this quarter. Again, recent Commitment of Traders (COT) data indicate short bets on the dollar are at record highs. If you’re a hedge fund that is up in your position where you’re short the dollar and long yen, you’re going to want to unwind part of that trade. Consequently, you’re going to place upward pressure on the dollar and downward pressure on the yen.

Bonds have also been a favorite short target of hedge funds. Recent COT data show bond short interest is also at record highs. If you’re making money on this trade, again, you’re going to want to unwind some of your risk heading into the quarter’s end. By buying back your short, you could place downward pressure on interest rates due to inflated demand. This in turn could pressure financial stocks on concerns that interest-rate spreads are compressing.

Why do I mention this? Because, while the market is due for a short-cover rally today and tomorrow, I would keep an eye on the action in the dollar. A data point that we like to mention from time to time is 47% percent of S&P 500 Index revenues come from overseas sales. When the dollar weakens, the S&P typically rallies on this data point. Conversely, when the dollar rallies, the S&P tends to fall.

If the dollar sees a decent cover rally, this could weigh on the S&P 500 and the broader markets. Also, given financials have been market leaders of late, any downward pressure on 10-year rates could also weigh down the markets.

Bear this in mind as the volatility is likely to remain interesting. I still like the setup for a market move higher from a longer-term perspective.


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