Will The Shorts Bank Those Profits Or Get Squeezed?

In terms of fundamental data, it was not a great week for the stock market or the economy. Monday’s Empire State Manufacturing Survey was the exception as it rose for the first time in five months and the S&P 500 posted its best day of the week. Most earning reports disappointed investors, especially Telsa (TSLA), which declined over 10%.

This was in contrast to Thursday’s Philadelphia Fed Manufacturing Survey which came in at -31.3 down from last month’s 23.2. This was the eighth negative reading in a row and the worst reading since May 2020. This survey has many components and more details with analysis can be found at AdvisorsPerspectives. Their analysis of the Leading Economic Index forecasts the start of a recession by mid-2023.

It was a messy week for the markets as the Dow Jones Utility Average did the best rising 1.4% with the Dow Jones Transportation Average gaining 1.2%. The iShares Russell 2000 was the only other weekly gainer as it was up 0.60%.

The SPDR Gold Shares led the decliners down 1.1% followed by a 0.60% decline in the Nasdaq 100 (NDX). But NDX is still the leader year-to-date as it is up 18.8%. The S&P 500 and Dow Jones Industrial Average had minor losses.


There were several days last week where the market opened lower but then spent the rest of the day climbing higher. For example, the Spyder Trust (SPY) closed Tuesday at $414.21 but then opened Wednesday at $412.21 but then rallied to close at $414.14.

This can be a bullish sign as those who sold overnight, or the prior day expecting a sharp decline are caught on the wrong side and are forced to cover short positions. For the past month, as reported by Bloomberg, large speculators have had the largest short position in the E-mini S&P 500 futures since November 2011. A sustained move above 4250 in the S&P 500 will likely trigger widespread short covering.

Interestingly, there was also a Zweig Breath Thrust signal in October 2011 like there was at the end of March. The buying from the lower opening last week likely helped the NYSE Advance/Decline numbers from being more one-sided. They were only slightly negative for the week with 1466 issues advancing and 1702 declining.

The NYSE Composite was also down slightly last week but closed at 15,578 which is 0.9% above its still rising 20 day EMA. There is next support in the 15,300 area while in March the NYSE bottomed in the 14,500 area.

The NYSE All Advance/Decline Line closed the week just below its WMA. A day of strong A/D numbers early in the week is needed to avoid a move in the A/D line analysis into the corrective mode. The Nasdaq 100 A/D line closed below its WMA last week and the Russell 2000 A/D line is also negative.

The McClellan oscillator, along with the A/D line analysis, helped to identify the stock market’s turn higher in March. It has been declining for most of April and closed below the zero line last week. This makes the market internals especially important this week.

I will also be focused on the ratio of the iShares Russell 1000 Growth (IWF) to the iShares Russell 1000 Value (IWD). The decline from the August 2022 highs to the lows in early 2023 lows was a period where the value IWD led the growth IWF.

The rally in 2023 has been led by growth as indicated by the rising ratio. It is testing its uptrend and based on the daily MACDs it is not yet clear that the rally is over. That may be determined by this week’s earnings and it is likely that if the ratio resumes its uptrend the S&P 500 will accelerate to the upside. This should cause a short squeeze in the futures while a further decline in the IWF/IWD ratio could take the pressure off those who are short the futures.

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