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Pain Trade Is Higher as Risky Season Approaches: Technical Analyst

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It has been said that markets will always deliver the maximum amount of punishment to the broadest amount of people. If you support this belief, then right now the so-called "pain trade" would be for stocks to keep rising and bonds to keep falling; exactly opposite of what most investors expect.

"The pain trade could certainly be higher," says Dan Wantrobski, director of technical research at Janney Capital, in the attached video. "The number one [question] I get on the desk is, 'what can I short, what should I sell?'"

And he's not alone. The Wall Street Journal today highlights the pain that is being inflicted on short-sellers, while fresh CBOE data shows 62% of the open interest is in put contracts, or bearish bets on S&P 500 (^GSPC) futures.

Even so, Wantrobski says a bearish skew in sentiment, complacency about volatility, and numerous "bear crosses in short-term moving averages" has him on watch for what could be a doubling or tripling of what has, thus far, been only about a three percent pullback in August.

Officially, he's targeting short-term support for the S&P 500 in the 1560-1600 range, which implies a 6-9% decline from the all-time high of 1708 set three weeks ago.

"We just feel that markets are a bit frothy and they're extended against a number of the longer term moving averages," he says, adding that we are also entering a typically weak and risky season for stocks.

His advice is to "be a trend follower rather contrarian trader" and to "let the tape dictate what you should do," while being mindful of the fact that a buying opportunity, or what he calls a "new reflationary bull market cycle," may be coming.

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