sentimenTrader Blog

2018-11-29 | Jason Goepfert

This is an abridged version of our Daily Report.

Sentiment vs earnings

The S&P 500’s flat return in 2018 so far has been due to the growth in earnings being offset by a drop in sentiment. The price/earnings ratio for the index has declined about as much as earnings have grown, like 2011.

Other years since 1969 that have seen this dynamic typically showed good returns over the next year. Most impressive was the risk/reward – the S&P rallied more than 21% on average at its best point over the next year, while declining an average of only 4% at its worst point.

Everybody out, then back in

Massive sell programs hit the market multiple times near the end of October. But 2 of the last 3 days have seen just as massive buy programs come in at some point during the day. Wednesday’s TICK reading is in the top 10 of all days since 1990, which is usually a good sign longer-term, especially when coming on the heels of big sell programs.

In the medium- to long-term, it was a good sign of eager buying interest that wasn’t easily sidetracked. What’s most encouraging about this is that the huge buying interest is coming on the heels of the heavy sell programs.


After hitting a 6-month low on Friday, the S&P 500 has jumped at least 1.5% twice in the past three sessions. That has happened 44 times since 1928, only 16 of which occurred when the economy was not in recession.


The Optimism Index on natural gas has soared above 80 and is the highest in more than 20 years.

2018-11-28 | Jason Goepfert

This is an abridged version of our Daily Report.

Heavy selling south of the border

Mexican stocks have dropped 30% from their highs in US dollars and 20% in pesos.

This has nothing to do with the politics of the new administration, which admittedly is a big omit. In emerging markets, new ruling parties can have an outsized impact on markets. But declines this severe have usually preceded at least short-term bounces, including in emerging markets generally.

Monday’s drop of more than 4% to a new multi-year lows also shows signs of being exhaustive, with excellent long-term returns in Mexican stocks and emerging markets generally.

Put interest

Over the past 8 weeks, the smallest of options traders have focused so much on buying puts as a percentage of their total option volume that the only times that can match it were near the ends of the bear markets in 2002 and 2008.

This comes even as other traders let their put contracts expire, pushing open interest below what was seen near the low in October 2008. While many like to assume that this is a contrary indicator, it is not. A high level of put open interest tends to be a negative for stocks; a low level tends to be a positive.


There have been 13 other times since 1928 when the S&P 500 limped into the end of November within 3% of its 6-month low.  

Mexico, again

If you go to the Optimism Index Heatmap and click the 50-day moving average, the most-hated ETF we follow is EWW. According to the Backtest Engine, when the 50-day average Optimism Index for EWW has dropped below 35, where it is now, EWW was higher a year later 91% of the time.

2018-11-27 | Jason Goepfert

This is an abridged version of our Daily Report.

Rush to safety

Investors have moved into “safe” low-volatility stocks at the expense of “risky” high-beta ones. The ratio between the two just hit a two-year high, which has preceded some trouble for stocks over the shorter-term.

Over the longer-term, which is where this should be most effective, its record was mixed. The S&P did show relatively poor returns, but there were some large gains too. Perhaps most importantly, the risk/reward was skewed heavily to the downside.

Worst-case corrections

If we assume the worst case, that Friday’s move into a correction for the S&P 500 morphs into a peak of economic activity and a recession, then most of the damage could already have been done.

It takes the NBER about six months to announce it, by which time the S&P has lost a further 5% on average. But its returns over the next few months were much less severe than most investors would expect. From the date the S&P fell into one of these worst-case corrections until three months later, it showed a gain only once. But its average return was only -2.8%.


The stock of art dealer Sotheby’s (BID) has dropped by more than a third from its peak in June. This is often taken as a warning sign for the broader market. We looked at this in the November 11, 2015 report, where declines of 33% in BID correctly preceded 3 major declines in stocks, and had 2 false signals.

The latest Commiments of Traders report was released, covering positions through Tuesday

The 3-Year Min/Max Screen didn’t show any new extremes of note (just orange juice and 2-year Treasuries), as hedgers mostly modestly eased back on their existing positions.

2018-11-26 | Jason Goepfert

There certainly wasn't much of the typical pre-holiday buoyancy in markets last week. Bucking the traditionally positive, low-volatility holiday trading, markets got hit hard, particularly the stock market.That left the S&P 500 at a 6-month low the day after Thanksgiving, which has never ...

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2018-11-20 | Jason Goepfert

I am out of the office this week, however there have been a lot of questions about the Nasdaq's plunge on Monday. So let's look at its decline from a few different perspectives to see if Monday might be a precursor to something worse, of if there are compelling signs that it was exhaustive selling.

It's the first 3% decline to a 6-month low for the Composite since 2016, and every time it's happened since 2009, returns over the next 3 months were very strong, but of course we've been in a persistent bull market so that's to be expected. Overall, there were a lot of failures.

If we filter the table to only those signals when we were not currently in recession, which is essentially a 100% guarantee at the moment, then we get the following.

Still not impressive. Over the next 2 months, the Nasdaq was down more than it was up and average risk was unacceptable. But hey, it's November and we're in the most consistently positive time of the year for stocks. So how about if we look at all similar drops but only when they occur in November?

Well, that's even worse. All three times it happened (in clusters), stocks were in or heading into a bear market. When sellers didn't care about seasonality and shed tech stocks with abandon, we were heading into prolonged declines in 1974 and 2001. In 2008, at least we were in the final stages of the decline.

This is concerning.

But we're not in a bear market yet. If we use the definition of bull and bear markets from Ned Davis Research, and look for big declines to a 6-month low when we're not currently in a bear market (assuming their definition is currently suggesting we're still in a bull market) then the sample size drops dramatically.

Here, there were moments of temporary panic that were, for the most part, quickly recovered. Granted, this is kind of a backward-looking filter and may not be the best way to look at it. We have to make the assumption that declines are going to stop relatively soon and/or not spread to the broader market. If that is the case, then tech stocks' returns over the next 6-12 months look fantastic. That's kind of a tautology, though.

Buyers aren't showing any particular enthusiasm for tech bargains this morning, with the Nasdaq indicated to gap down another 1%. Even the usually positive pre-holiday vibes aren't working. If we look for big drops and then another big drop at the next day's open, we get this.

Still not a very good sign. In fact, it's quite bad. We usually saw further weakness in the month(s) ahead.

We didn't see a big jump in pessimism on Monday. Fewer than 40% of our indicators are showing pessimism, Dumb Money Confidence is low but not as extreme as it was in February (that's not necessarily a bad thing), and even the Short-Term Optimism Index didn't register an extreme on Monday. So other than the seasonal tendency to see a drift higher into Thanksgiving, there isn't anything among our indicators or studies strongly suggesting an imminent bounce.

We still have the very strong medium-term positive bias from everything we discussed in late October, and those had a sweet spot of 2-3 months. The volatility we've seen over the past two weeks is relatively normal after readings like that, but the new low in the Nasdaq is a definite concern. Personally, I am not reducing what is already low exposure to stocks, but I don't see anything that makes me want to increase it, either.

2018-11-16 | Jason Goepfert

This is an abridged version of our Daily Report.

Puts have become popular

Since the market peaked in September, most days have seen at least 10% more put options traded than call options, the largest cluster in three years. Out of a total of 27 days in the sample, the S&P was higher two months later after 26 of them (there were no signals prior to 2007).

An argument could be made that all of this put activity isn’t traders panicking by buying protective put options, but rather trying to collect premium and be a little bit bullish by selling puts to open instead. Even while that’s considered a bearish contrary indicator, that’s not the way it has worked in S&P 500 options.

Sector funds struggle to beat risk-free

There isn’t a single Fidelity sector mutual fund that has managed to beat cash over the past few months.

Other times we’ve seen this, stocks generally did well over the next couple of months. That’s also true after the 20-day average of the breadth indicator drops below 10%, which it just did.

Not many up days

Per Deutsche Bank, the S&P has been up only 12 out of 39 days (since the September peak). That has led to a positive one-month forward return 71% of the time since 1928 and 90% of the time in the past 50 years.

NOTE: There will be no Lite report the week of Thanksgiving. Have a safe and joyous holiday!

2018-11-15 | Jason Goepfert

This is an abridged version of our Daily Report.

Fear and loathing in junk bonds

High-yield bonds had a very bad day on Tuesday, with extremely poor breadth and sentiment.

On Tuesday alone, nearly half of all high-yield bonds declined on the day, they went from an almost even number of 52-week highs and 52-week lows, to seeing 300 more bonds at new lows than new highs, traders pulled a large amount from the popular HYG and JNK funds and that helped push the average discount on HYG and JNK past 0.5%, which is large for an ETF.

The other times it was this bad, that market typically rallied, especially outside of the financial crisis.

Energy apathy

The ratio of Energy stocks to the S&P is at a 17-year low, pushing their weight in the index under 5.5%. The few other times it was this low, the sector rallied strongly on both an absolute and relative basis. Six months later, the stocks were higher each time by an average of more than 20%, and with a 10-to-1 reward-to-risk ratio.

Oil contagion

There is concern that the collapse in crude has worrisome implications for energy stocks or the broader market. In a premium note, we looked at forward returns in the Energy sector and the S&P 500 after all the signals shown in the three studies in Tuesday’s report. Over the next two months, the Energy sector was higher 70% of the time with a 5.8% average return.

Hard to beat cash

Only one of the Fidelity Select sector mutual funds is beating a return on cash, and that fund is focused on gold. There have been 97 other days in the past 30 years when this has happened.

2018-11-14 | Jason Goepfert

This is an abridged version of our Daily Report.

A crude month

Crude oil has suffered one of its most epic collapses in 30 years and is the most oversold ever. It has lost a quarter of its value from a 52-week high in only 30 days, one of the fastest drops ever. And its Relative Strength Index has declined to the lowest level ever, dating back to the inception of the futures contract in 1983.

When we look at forward performance following all similar crashes, for the most part, there was a modest suggestion that this kind of selling pressure is exhaustive.

Fear of a collapses is spreading

While sentiment on oil is dropping rapidly, “smart money” hedgers haven’t reduced short positions too aggressively, and optimism is still above washed-out levels. That should change soon, as there are starting to be some signs that fear is rising quickly. The Crude Oil VIX just spiked above 55, its highest in two years.

Golden window

On the Commodity Sentiment & Seasonality Screen, gold is showing up as having low optimism during a positive time of year. Over the past 20 years, when gold’s Optimism Index was 30 or below in November, it showed a positive return 2 and 3 months later after 32 out of 34 days.

2018-11-14 | Jason Goepfert

In the Daily Report on Tuesday, we took a look at several studies showing the historic collapse in crude oil prices. As the drop in that market continues to reverberate, broader financial media is taking the usual fear-laden tack that it will lead to a jump in high-yield bond defaults (which is ...

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2018-11-13 | Jason Goepfert

This is an abridged version of our Daily Report.

A weak retracement

At its high point of the bounce during the past two weeks, the S&P never managed to retrace more than 61.8% of its pullback from the September peak.

It has now started to fail and fall back to the lower end of its range. While considered a technical warning sign, weaker retracements like this have led to much better returns than stronger ones that initially exceeded that 61.8% "resistance" level.

A new dollar milestone

The U.S. dollar hit a 350-day high for the first time in nearly two years on Monday, ending one of its longer streaks without this significant of a high. Other times it reached this kind of milestone, stocks did fine going forward, especially the defensive sectors, but commodities stumbled, especially gold. For the S&P 500, it showed a bit of weakness over the next couple of weeks, but that was about it. After that, its returns were mostly positive and with a decent but not great risk/reward. Six months later, the S&P was higher 84% of the time. Only 2001 and 2008 showed any meaningful weakness.

Energy crunch

The OIH Oil Services fund is the most-hated among ETFs we follow. Over the past 20 days, its Optimism Index has declined to just over 25, the 4th worst in its 5-year history. According to the Backtest Engine, there have been 10 other days when the 20-day average was this low, leading to rebounds over the next two weeks each time.

Dollar bulls

The 20-day Optimism Index on the U.S. dollar is climbing toward 70. Over the past 15 years, there have been 438 days when the average was as high as it is now.

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