Amid the current backdrop of corporate earnings reports and interest rate jitters, traders are setting up short positions in anticipation of further broad market declines.
Their moves are indicated by open interest–the number of outstanding contracts–in Standard & Poor’s 500 and Nasdaq futures, which has been climbing steadily.
The combination of lower trending prices and rising open interest clearly shows futures traders are braced for continued stock market declines.
The stock sell-off that began last week has come despite generally good earnings reports. It “was a classic `buy-the-rumor, sell-the-news’ kind of deal,” said Larry Israel of Hammer Trading. “Everything that is being reported right now is already in the market, and everything going forward is not going to be as good.
“Microsoft traditionally puts a damper on its earnings. They always try to talk them down. Microsoft and IBM were sort of the cathartic event that told people no matter how good the earnings are, it’s already in the market. That is why we are getting a retracement in the market.”
Even though earnings have been beating consensus estimates and topping year-earlier results, traders are quick to see problems on the horizon.
“Second-quarter earnings have reached a cyclical peak, because in the high-tech industry, people accelerated all their orders earlier this year in preparation for Y2K,” one floor broker at the Chicago Mercantile Exchange said, referring to the computer bug involving the year 2000.
Futures traders also point out that the market is sitting on a troublesome seasonal factor: The market hit an all-time closing high July 16. Last year, it peaked the same weekend, then plunged 20 percent over the next 11 weeks.
