At the end of November, we mentioned that the US stock market was convinced of calm further growth while pointing to the fact that this attitude of investors could lead to anxiety. The last two sessions could show how quickly broad optimism can turn into a sudden increase of fear and anxiety among the bulls.
Weaker data that came from the manufacturing sector in the form of ISM and the possibility of escalating trade war not only with China but also with other countries may have contributed to the decline in major US stock indices. It was the rise of global tensions that was to spoil the mood of the bulls to the delight of the bears.
On Tuesday, President Donald Trump warned China that the trade war could go on farther and longer than just until the 2020 election. The statement by Trade Secretary Wilbur Ross leaves no doubt about further tariffs. The tariffs will come into effect on December 15 and will continue unless there is an agreement, Ross said. These messages appeared just a day after the US proposed tariffs for goods from France, such as cheese and champagne. The United States also threatened to impose tariffs on steel from Argentina and Brazil, raising concerns about an escalation of the trade war.
Investors also deserve attention what happened in the second half of November with positioning on futures contracts on the so-called VIX fear index, which we wrote about at the end of November. Investors with speculative market attitudes have further increased their expectations of falling volatility. Thus, long net positions dropped to a record low. This attitude threatens the so-called short squeeze, i.e. quick closing of short positions, which may be associated with an increase in VIX contracts, and this could mean potential declines in the stock market.
VIX futures net long positions. Source: tradingster.com
Thus, instruments such as US500, US30 or US100 (CFD on the S&P 500, DJIA and Nasdaq 100 index, respectively) can be closely watched on the Conotoxia platform, as these may be subject to greater volatility, especially when sellers of futures contracts on VIX capitulate.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal Opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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