Need to Know: S&P 500 needs to drop even further to curb investor mania

Trade-war de-escalation perks — catch ‘em while you can.

Skepticism should be natural every time this saga takes a positive turn, given investors have been riding the U.S.-China trade roller coaster for over a year. But a tariff reprieve for Chinese imports of mobile phones and toys — holiday favorites — sent stocks flying Tuesday.

For Wednesday, economic worries are back with a vengeance, to get around that. The bond market’s favorite recessionary indicator threw up a big red flag this morning and futures are tanking. (see Chart of the Day). Ahead of that, data showed the global economy, particularly in trade-sensitive nations like Germany and China, struggling. China industrial output while

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Our call the day will arm some of the skeptics out there. It comes from RBC Capital Markets’ head of U.S. equity strategy, Lori Calvasina, who has been about an excess of investor euphoria when it comes to the S&P 500  . She says the recent drop in stocks has only made a dent in that mania.

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Calvasina tracks weekly U.S. equity futures reports provided by the U.S. Commodity Futures Trading Commission (CFTC), data used by some on Wall Street as a measure of sentiment of how hedge funds and institutional investors are positioning in the U.S. equity markets.

Her chart shows long equity futures bets spiked in mid-July, bringing them back to the highs of January 2018 and September 2018 — both in line with levels not seen since just before the Financial Crisis . “This has been telling us that institutional investor positioning has been euphoric and that the U.S. stock market remains vulnerable to bad news,” Calvasina told investors in a note Wednesday.

The chart also shows that positioning in those futures is starting to unwind. It reflects levels as of August 6, which includes the worst day of 2019 so far — a 3% drop for the S&P on August. 5.

“But even with the drop that occurred, current levels are still well above past lows including those achieved in December 2018,” says Calvasina. “We won’t be sleeping well anytime soon, based on what we saw, given our worry that downside beyond even 2,725 [on the S&P 500] may be needed to full resolve this crowding problem.”

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Opinion:

The chart

A closely watched recession indicator, the difference between the 10- and the 2-year Treasury note yield  , as of early Wednesday. When that has happened in the past, the U.S. economy has . It hasn’t inverted since 2007, and Twitter’s market watchers are all over this one.

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The markets

Dow , S&P  and Nasdaq   futures are pointing to .

Also sharply lower is oil , ahead of U.S. supply data due later. The dollar is flat and gold   is up.

Europe stocks , while Asian equities saw a .

Opinion:

The buzz

The We Co., parent of shared office spaces group WeWork, has , and also said it lost $1.6 billion in 2018.

Overstock  CEO Patrick Byrne’s tales of international espionage and conspiracy for fed-up investors of the struggling e-commerce group,

Facebook  may be in hot water again over privacy issues after Bloomberg reported the social media company has been .

Food delivery firm Grubhub  and industrial heavyweight 3M  are among companies most vulnerable to an attack by activist investors, .

A day ahead of Thursday’s huge data dump, import prices are due ahead of the open.

The quote

“How anxious are they to instigate and see chaos!” — That was , who accused U.S. lawmakers Nancy Pelosi and Mitch McConnell of stirring up trouble with their comments over Hong Kong unrest. Meanwhile, the territory’s airport has just .

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