Dow Jones futures fall as yields spook markets

Dow Jones futures fell in line with most other indices across the globe on Wednesday. Equity markets had made a confounding rally for the back end of March. This was largely down to Commodity Trading Advisors (CTA) positioning with trend following system exacerbating the lack of liquidity and squeeze higher. Most fund managers had been underweight equities and speculative players had been short.

Once the rally recovery began, CTA accounts began squeezing the main indices like the Dow Jones higher. For those not aware CTAs are a type of fund or hedge fund that operate only in futures markets like the Dow Jones. They do not hold any client money and put have power of attorney to place trades on client accounts. They can be huge players as futures involve leverage. Many are trend-following and using automated systems but many are also discretionary. Some of the most famous traders in history were CTAs, such as Richard Dennis and Paul Tudor Jones. More recently John W Henry owner of Liverpool FC and Boson Red Sox is a CTA.

As mentioned, the majority of CTA funds are trend following. They work well in situations we just witnessed at the end of March. Positioning was underweight equities and volatility was dropping. The squeeze was on. A small position was gradually added to push the market higher and higher.

As well as CTAs we also had a huge corporate buyback in operation which has now come to an end. Results season is upon us and companies are not allowed to pursue buyback programs in the lead of their results.

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Dow Jones futures news: New hawks Daly and Brainard hit stock market

The Fed minutes on Wednesday added to hawkish comments made by Fed members Mary Daly and Lael Brainard. What was more notable was that Daly and Brainard are usually doves (lower rates).

This and the minutes put more pressure on equities and it was the yield-sensitive growth and tech spaces that suffered the most. Nasdaq futures dropped over 2% while Dow Jones futures lost just 0.44% by comparison. The Fed minutes were more hawkish than thought. The Fed seemed would have hiked by 50 bps if not for the uncertainty generated by the Russia-Ukraine conflict. So 50 bps is now nailed on for May. This has seen bonds reprice lower and yield higher. The Fed also gave clarity around its tapering with a more aggressive stance envisioned here.

It remains to be seen how bonds can hold up given the biggest buyer in history is stepping away. The second-largest bond buyer in history (the ECB) is also stepping away. Look out below!

Dow Jones futures forecast: Perfectly established downtrend

The 200-day moving average has worked well to stall the resistance for Dow Jones futures. Again this would be consistent with the trend following CTA programs. We also stopped short of breaking the previous high at 35,752, again consistent with the trend following systems modus operandi. We now have put in 3 lower highs in succession so have established a strong downtrend, 36,832, 35752, and now 35,281. We also have a perfect corresponding series of lower lows, 33,928, 33,031, and 32,167. So the most recent 32,167 is now our target. Breaking 35,281 breaks this trend but for now, it is in place. 

Dow Jones futures chart, daily