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Go to: Top | Short-term Outlook | Int-term Outlook | Equity Updates | Indicator Summary | Commodity Updates
Short-term
Outlook (1-5 Days):
Go to: Top | Short-term Outlook | Int-term Outlook | Equity Updates | Indicator Summary | Commodity Updates
Intermediate-term Outlook (1-3 Months):
What: We will move back to Neutral if the S&P
500 cash index trades below 1040.
Why: On
April 15th, the Dumb Money pushed up to 75%, and the
spread between that and the Smart Money reached to -45%.
In addition, we got a tremendous surge in the number of
bearish (for the market) Indicators At Extremes.
After we got the expected weakness and volatility exploded
higher, we experienced a very unusual situation with the "shock
day" on May 6th. We looked at somewhat similar days
on
May 7th, and the conclusions were clear - a
short-term rally was likely, probably being capped at a
62% retracement of the crash, then a re-test of the
panic lows. Since late May, we've looked at
quite a few bullish intermediate-term studies - we got
a major surge in pessimism, then several positive breadth
thrusts and positive price performance, all in the context
of an ongoing bull market. That has led to consistent
and significant gains when looking over the next 2 weeks to
1 month. However, June 4th's Payroll Report kneecapped
the nascent rally attempt and took us to a new closing low.
That is very unusual given the studies we discussed and
cannot be dismissed. But since we have seen a lot of
give-up among
Rydex traders
and
small options traders, and the S&P made another go at a breakout
above minor resistance (at 1080), we're willing to give the
bullish outlook another shot.
Recent Studies:
Two up days after a month without (6/04):
Bearish
Multiple breadth thrusts (5/28): Bullish
Extremely high ADX reading (5/27): Bullish
Oversold Indicator Score (5/21): Bullish
Sentiment:
Trend:
Some signs of too much pessimism.
Still pointing up. Sup /
Res:
Other:
R: 1105; S: 1040 Nothing notable.
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Short-term Outlook
| Int-term Outlook |
Equity Updates |
Indicator Summary |
Commodity Updates
Equity Indicators - Updates and Extremes
In late May,
most of the traditional put/call ratios were suggesting that traders
were fearful. The
Total Put/Call Ratio spiked to one of its most extreme levels ever,
and even when just looking at equity options, the
moving averages were at their most-stretched levels since the depths
of the bear market. One of the
problems I've had with the data is that we weren't seeing confirming
extremes in the ROBO Put/Call Ratio. This is the one we created
several years ago which includes only the smallest of options traders,
and only opening purchases. So none of the complicated strategies
from hedge funds get mixed in - it's about as pure a real-money
sentiment indicator as we're going to find. Despite a 2.5%
rally in the S&P 500 last week, small traders bought 53% more protective
put options than they did the week before, obviously in a bet that we
were seeing a sucker's rally. Their next most popular strategy was
selling call options (also a bet that the market wouldn't take off to
the upside), as that volume jumped nearly 30% from the week before. The chart below
shows the ROBO Put/Call Ratio from the start of the bear market, along
with the percentage of small-trader volume that went into buying
speculative call options, and the percentage that went into buying
protective put options.
We can see that
the combination of a drop in speculative call buying and the rush into
buying put options (at the highest pace since November 2008) was enough
to push the ROBO Put/Call Ratio to one of the most extreme levels we've
seen in the past three years. The only weeks
that witnessed a more extreme ROBO ratio were in mid-March 2008 and
again in mid- to late-November 2008. After the former, the S&P 500
rallied about 5% during the next month; after the latter, it rallied
more than 10% in a very volatile fashion. Let's zoom that
chart out and look at its entire decade-long history:
Again, the
extremes in the ratio compare favorably with those seen near the depths
of prior bear markets. The rush into
put options is especially striking now. Last week, small traders
spent 24% of all of their option volume buying protective puts - at the
worst of the worst times during the prior bear markets, that amount only
reached 28%, so we're not too far off from that. Call buying
could dry up some more, though. Last week, they spent 29% of their
volume on speculative calls. At prior extremes, that dropped under
20%. Of course, that was after months (or years) of being in
vicious bear markets, unlike the price damage we've seen so far. Overall, this
consistently contrarian data is showing compelling extremes, and it's
something that should prove to be a positive for the market in the 1-3
month time frame.
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Short-term Outlook
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Equity Market Indicators
Notes: In mid-April, we got a huge spike in the number of bearish (for the market) indicators, and after a tiny hiccup, stocks went on to make another high. It was choppy and took longer than usual, but it finally resulted in those gains begin given back per usual.
Now we've seen the opposite condition, with only one bearish extreme and more than 40% of our indicators at a bullish extreme on May 24th. That's the most since March 2009, though it has gotten as high as 50% - 70% at some of the true panic lows over the years. We've certainly seen enough extremes for a tradable bottom - just not a maximum reading.
More history:
* New extreme
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Bonds, Commodities and Currencies - Updates and Extremes
Nothing notable for today.
Jason Goepfert Founder, Sundial Capital Research, Inc.
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June
14, 2010,
7:30am EST
Neutral
From May 25, 1049
SPX
25% Bullish
From June 10, 1080
SPX
Bearish For The Market
