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July 10, 2018

Investor Movement Index rebounds, correction fears ebb

Investor Movement Index rebounds, correction fears ebb

A sigh of relief on retail side?


Retail investors resumed cautious buying of US equity in June despite trade war fears.

Last month, the Investor Movement Index (IMX) rose to 5.45 points maintaining growth for a second month in a row. Prior to that, the Index was down for four consecutive months.


Investor Movement Index

Investors Movement Index IMX. Source: TD Ameritrade


Recall that Investor Movement Index is calculated by the broker TD Ameritrade, serving about 6 million сlients. The rise in indicator means that the majority of retail non-professional investors are bullish on stocks, while decline in the index shows they prefer to sell stocks

In December 2017, the index reached its historical high of 8.59 points, suggesting that the stocks were heavily overbought at the end of last year. By the February 2018 there were no more buyers on the market and stocks plummeted, erasing almost 10 percent from their value (S&P 500 index).

By the beginning of the third quarter, the S&P 500 was about 5% below its historic highs, while Investor Movement Index was at 36% from the all-time peak. Recovery of the index lagged behind the rebound of S&P 500 indicating that institutional investors played a leading role in providing support to the market. 

Volatility sellers which try to profit from the market calm dampened premiums on options, indicating low implied volatility ahead on S&P 500.  It works as another effective pillar for stocks, though increasing risk of sharper drop in case of extraordinary events. 

This time retail investors have been buying such shares as: Micron, Netflix, AT&T, General Electric.

Exxon Mobil, Facebook, AMD, General Motors, in turn, led declines, as markets downgraded their earnings outlook because of trade tensions with China and other trading peers. 

There is a wide belief that high demand from non-professional market participants is an effective indicator of looming price correction. That makes sense since they are usually last to get important and relevant market information, while savvy institutional investors already reversed their bets. So far, retail traders have not shown much optimism about the shares, which leaves room for further growth of US stock markets.


Another reason why Central Banks should be cautious in raising rates


World central banks have embarked or are about to embark on a tightening of monetary policy. What are the perils of this move?

According to the Institute of International Finance, the global debt in 2017 reached an eye-popping $237 trillion, increasing by $21 trillion a year or 9.7% over the year. At the same time, world GDP has barely exceeded $80 trillion, which is 6.2% higher than in 2016.


world debt and GDP growth

Word GDP and world debt change. Source: Bloomberg, WorldBank


Thus, the debt of all economic agents of the world, states and households is 2.93 times more than world GDP. Over the past 20 years, Debt to GDP ratio reached historical high in 2009, just after the global recession, when the volume of liabilities surged and the world economy shrank.

The tightening of monetary policy by Federal Reserve leads to an outflow of capital from emerging markets, which affects interest rates within countries. That is, the actions of the US regulator affect virtually all world markets.

It turns out that an increase in Fed’s rate shall pull up rates in the rest of the world. Given the level of world debt, an increase in the interest rate by 1 percentage point will lead to the fact that the cost of its service will rise by $ 2.37 trillion a year. The interest rate growth should be accompanied with respective economic pickup to not cause additional strains to economic recovery. 

Part of the growth in global debt last year was due to the weakness of the dollar, but in recent years it has been growing faster than the economy. For example, since 1999, the volume of liabilities has increased 2.82 times, while GDP has increased by 2.48 times, in absolute terms it is 153 trillion and 48 trillion dollars, respectively.

Thus, in the past 20 years, three dollars of debt generated only one dollar of GDP.

It is the size of the debt that should raise concerns about the world’s central banks measures, as in the era of cheap interest rates bubbles tend to inflation, while, during tightening phase, they can easily burst.


COT Oil data analysis for 06.06.2018


Hedge funds for the seventh week in a row cut their long positions on oil.

By June 06, there were 362.7 thousand long and 49.3 thousand short contracts in the portfolios of funds. It is 12.2 thousand and 1.4 thousand less than a week earlier, i.e. long positions shrunk more in absolute value than shorts. Net long decreased to 313.5 thousand contracts – the lowest since October 2017. 


net hedge fund position oil

Net crude oil position of hedge funds. Source: NYMEX


At the same time, the average net long position in oil since 2015 is at the level of 239.9 thousand contracts, that is, to achieve it, it is necessary to sell crude oil in another 73.6 thousand contracts.

The main buyers of oil are now small speculators – the volume of their net “long” reached a three-year record, exceeding 56.1 thousand contracts. They have been boosting long positions on crude oil for the fourth week in a row.


net non-commercial position crude oil

Net position of small speculators. Source: NYMEX

The four largest market participants, in turn, continue to wait for price cuts – their spread between “shorts” and “longs” increased to 5.5 percentage points in favor of the former.

Oil prices stubbornly resist and do not want to decrease. Because of the geopolitical risks, the correction, which affected oil is not like a collapse, but a step-wise one. If the tension in the commodity market remains, then it is likely that decline in prices will not be so significant, in which hedge funds will have time to liquidate and take profits. It will allow oil to start an upward movement again in the future. 

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