sentimenTrader Blog

2016-02-17 | Jason Goepfert | Comments

There is still a few hours to go in today’s session, but buyers are working on a third straight day of impressive pressure.

Friday, Tuesday and today (so far) have all seen more than 80% of volume on the NYSE flowing into stocks that are positive on the day.

From the intraday charts:


The last time this happened was back in 2010 and it has only happened a total of 10 times since 1957 when the S&P became a 500 stock index. Returns going forward tended to be quite positive:


We can see that across all time frames, returns were above average, significantly so in the 1 week, 6 month and 1 year time frames. A year later, there was only one negative return and among the others, only one more that was less than +15%.

The biggest outlier was January 2009, when buyers rushed in at the beginning of the year, after what looked like a false breakdown in the indexes. It didn’t turn out that way, and there was an almost immediate reversal to new lows.

If stocks hold up into the close, we’ll likely see a flood of extremes, as usually happens when there is a persistent 3-day move. That almost always means some give-back in the shorter-term, but also almost always means more gains in the medium-term.

2016-02-17 | Jason Goepfert | Comments

This is just a quick note to mention that the S&P 500 is poised to begin trading with more than +1% gap open from the prior day’s close. This is highly unusual.

Going back to the inception of index futures in 1982, there were only two other days (!) that managed to accomplish this, November 25, 2008, and August 27, 2015.

After both instances, stocks retreated in the next several sessions, suffering 2-to-1 risk-to-reward ratios. Three days after the 2008 occurrence, the S&P was -5.9% lower and after the 2015 occurrence, -2.7% lower. Those returns are from the open of the third gap day.

If we relax the gap size to +0.75%, then there were 9 occurrences. Three days later, the S&P added to its gains only 2 times, averaging -1.9%. If we go even further and look at gaps of +0.5%, then there were 26 occurrences and the three-day win rate was 38%, averaging -1.2%, so still weak.

We’re likely to see our short-term guides hit more extremes with a third up day, so short-term traders will likely have some difficulty if trying to buy into this.

2016-02-16 | Jason Goepfert | Comments

With stocks staging another impressive rally, a few of our shorter-term indicators are moving to optimistic extremes, but not as many as we’d think.

Using preliminary pre-close data, here is what our main short-term guides look like:


The Optimism Index is about where it was on Friday, and the Risk Level didn’t rise. Put/call ratios are still relatively muted, and there is a surprising amount of volume flowing into inverse ETFs, not something we usually see after two days of fairly large gains.

Looking at those gains, there have been 39 times since the S&P became a 500-stock index in 1957 that it rallied at least 1% on consecutive days heading into Wednesday. The next day (Wednesday) was positive 38% of the time and the return from Tuesday’s close through Friday’s close was positive only 44% of the time averaging -0.3%.

When Monday had been an exchange holiday, then there were only 6 occurrences. All six closed lower on Wednesday and only one gained through Friday. The returns below are from Tuesday’s close through Friday’s close, using closing prices only.


It’s a bit silly, but it does suggest that a strong short-term rally into mid-week tended to back off. We’d be more concerned about that if the Optimism Index was really spiking. If buyers step in again on Wednesday and push Optimism further into extreme territory, then we’d be more anxious to reduce short-term exposure.

2016-02-12 | Jason Goepfert | Comments

The latest data on futures contract positioning has been released by the CFTC, showing some fairly large changes, especially in the metals.

The charts below show the past three years of positions for the major contracts. These are money manager and/or speculator positions, which is opposite from what we show on the site. So if a position is near the upper end of its range in these charts, then it means that money managers are heavily long relative to their range over the past few years. This is a quick way to see how trend-following speculators are positioned.



2016-02-11 | Jason Goepfert | Comments

With the latest survey results from the American Association of Individual Investors, most of the sentiment surveys we follow are showing extremely low levels of optimism.

As noted in last night’s Report, the percentage of bears in some of them are not at “panic” levels, so there’s that. It’s mostly a historic lack of bullishness more than a high level of bearishness.

Because stocks have an upward drift, it’s more rare to see extremely high levels of bearish opinion, and it’s a better indicator of an imminent low in stocks. We’re not seeing that yet.

Still, the overall depressed nature of the bulls will push the AIM Model down to 3%, one of its lowest readings ever. Because surveys were a lot more volatile prior to the past 30 years, we prefer to focus on more recent history, though as noted yesterday that introduces a more positive bias to the results as well.

Here are the returns in the S&P every time the AIM Model first dropped to 3% or below for the first time in at least three months.


Clearly a positive bias, particularly in the medium- to longer-term. The only negative returns were from July 2008, though they were severe.

Stocks are indicated to open badly once again today, so here are the returns in the S&P 500 futures from the opening print of any day that they gapped down at the open by at least -1% and the AIM Model was at 5% or below:


Here the results are more positive on a shorter-term basis, especially over the next 1-2 weeks. Buying into a gap down like this, with many stocks and sectors plumbing new lows, is a scary idea. Typically, if there is to be a multi-day or multi-week rebound, then we’ll see an intraday reversal or “tweezer” type of pattern where the next day more than makes up for the day of the decline. That helps to reduce the probability that we get sucked into a crash-type of decline where extremes simply don’t matter.

2016-02-09 | Jason Goepfert | Comments

As bad as U.S. markets have been, traders could be excused for thinking, “At least we’re not in Italy.”

The latest breadth figures are out, and it’s about as ugly as it gets in Italian stocks. Across all major U.S. sectors and broad foreign markets, nothing is as beaten down as Italian shares.

Among stocks in the FTSE MIB index, none are trading above their 50-day average, only 8% are above their 200-day average, a whopping 85% of them are trading at 3-month lows and 66% are trading at one-year lows.

That last figure is among the worst since 2003.


The damage has primarily been done in the past two months. The 10-week rate-of-change is nearly -30%, one of the absolute worst sell-offs over that time span in 20 years.


Other than during the peak of the financial crisis in 2008, such heavy selling over a relatively compressed time frame marked approximately lows in the index, or at least the final stages of the selling pressure. It tended to rebound strongly over the next six months, at least based on the small sample size available.

Investors have been yanking money out of the EWI exchange-traded fund as a result. It has lost an average of $5 million per day for the past 50 days.


Pressing short bets here looks more and more like tempting the mean-reversion gods.

2016-02-08 | Jason Goepfert | Comments

As stocks suffer more of a hang-over from Friday’s selling pressure, we’re seeing especially acute pressure in technology stocks.

The Nasdaq indexes suffered large losses on Friday, falling to one-year closing lows, and now there are indicated opening gaps of more than -1%.

This is rare, and has only been seen during the last two bear market cycles. Even so, the Nasdaq 100 has had a strong tendency to see a short-term bounce over the next several sessions.

Here are the returns any time QQQ fell -2% or more to a 52-week low, then opened down at least -1%. The returns are from the open of the day of the gap down, through the open of the day three days later.


All 14 led to bounces, though the maximum loss was heavy. It was still far outweighed by the max gain, so volatility was extremely high with an overall positive skew in the short-term. That also ties into the tendency for stocks to rally into mid-week after suffering a bad Friday/Monday combination.

2016-02-05 | Jason Goepfert | Comments

Assigning a reason to why a market is up or down on any particular day is typically a fool’s errand. That’s especially the case with stocks when so many inputs are coming together in a highly liquid market.

An initial knee-jerk reaction to an economic report or news event can often be pointed to as a catalyst, but the longer a day wears on, the more dubious that particular reason becomes.

Stocks are getting hit hard today, but whether that’s due to the below-expectations Nonfarm Payroll Report or the heavy selling in some tech names (or some other reason entirely) is anyone’s guess.

Let’s just pretend it has something to do with the Payroll report (NFP for short). We’e discussed behavior surrounding extreme reactions to this report in the past, and it has generally held up over time.

It works better if prices are at or near an extreme level, which isn’t really the case this time around. Even so, here is what has happened when the S&P lost at least -1% on NFP day:


These results are only for the next two sessions, which showed by far the most consistency. And it was usually negative, as the selling pressure carried through into early the next week. After that, the results improved more toward random.

Maybe it’s just when NFP misses estimates. To check, here is the same table, but only for those dates when the report was below expectations (the “less than zero” in the table refers to the amount that the payrolls were above/below expectations):


Pretty much the same results, though they actually improved a bit.

Most of them occurred during the bear markets of 2001-2002 and 2007-2008, but even so, results over the next month weren’t that bad. This is assuming we buy on the close two days later (so next Tuesday):


The S&P was higher 71% of the time, with a decent average return. We prefer to see the max gain be at least twice as large as the max loss, which isn’t the case here. And there were some large losses sprinkled in there.

Curiously, bonds are also down on the day, using the TLT fund as a proxy. This is highly unusual. With a weak jobs number, bonds would usually be higher, especially if stocks are selling off, because bonds act as a type of safe haven.

There was only one other time that the jobs report was below expectations, the S&P was down at least -1% and bonds also were down on the day, which was July 3, 2003. For what it’s worth, stocks rallied in the short-term after that, then fell back again before staging a longer-term rally.

Investors and traders like to obsess over the jobs number, mainly as a potential leading indicator for recession, so reactions to the number can be telling. Based on previous behavior, there tended to be some short-term follow-through to the selling pressure after days like this, but no more than over the next couple of sessions.


2016-02-03 | Jason Goepfert | Comments

The US dollar is getting hammered so far today, with the Dollar Index dropping nearly -2%, among the largest one-day declines since 1975.

It is on track for more than a -2.5% loss over the past three sessions, which is of course also one of its largest losses in that time span. What’s notable about the decline is that three days ago the Dollar Index was within spitting distance of a new high.


Sudden, severe price changes from a price extreme often signal a larger trend change, or at the very least a period of back-and-forth trading. Rarely do we see a market just turn right around and resume its previous trend.

The table below shows every time since 1975 that the buck suffered a big 3-day drop from near a 52-week high along with its performance going forward.


Its worst performance was over the next month, losing more ground 12 out of 21 times and with a significantly negative average return. After 1986, every time it did happen to gain over the next month, it subsequently gave those gains back.

To see if there was any impact on stocks, here are the same dates, but with the performance of the S&P 500 going forward:


Not much there. Some weakness shorter-term (two weeks) but overall the returns were in line with random.

The sentiment figures for the dollar that we track on the site are showing optimism, but nothing like last spring when it was through the roof. Nothing much to conclude from that – sentiment is less of a help when not at an extreme, and not showing a clear trend.

Based solely on this price break, we’d consider the outlook to have a modest negative skew, especially over a multi-week time frame.


2016-02-01 | Jason Goepfert | Comments

Stocks are backing off after the best gain in months on Friday. Optimism had reached the highest level in months as well, and when we see big gains like that in the context of a downtrend, high optimism tends to lead to sub-par short-term returns.

Futures are pricing in a gap down of about -0.5%. When such a gap down comes on the heels of a large gain, it tends to follow through to the downside throughout the day, but then rebound at some point in the next several sessions:


We can see from the table that there was a close above the open at some point in the next week in 11 out of 12 instances, typically within one trading day.

There is a similar tendency for any gap down of -0.5% or more on the first day of a month:


Again, open-to-close returns were mediocre, but 22 out of 24 instances saw SPY close above that open at some point in the next week, typically right away.

If we put Friday’s thrust into context, it was the largest gain in the S&P in more than 90 days, after the index had closed at a 52-week low in the past two weeks. Common wisdom is that this is a typical bear-market relief rally that’s bound to roll over to new lows.

The table below suggest that record is mixed:


On a longer-term basis, it was telling if buyers persisted. After these large one-day jumps off of a low, if the S&P was higher 3 trading days later, then it added to its gains over the next six months 64% of the time, averaging +6.2%. But if the S&P was lower 3 days later, then six months later it was higher only 31% of the time, averaging -2.3%.

Momentum doesn’t die easily, and we’ve seen some upside momentum recently. As much as we can rely on historical price patterns and seasonality, it argues that some very short-term weakness that burns off Friday’s surge in optimism should lead to another poke higher in the days ahead, and that would be a good sign longer-term as well.

← previous page · next page →