sentimenTrader Blog

2016-05-17 | Jason Goepfert | Comments

As a follow-up to yesterday’s look at the exploding interest in gold, we’ve been asked to look at open interest in precious metals futures.

Open interest is simply the number of futures contracts that have been opened (long or short) and are still outstanding. Typically, if open interest is rising along with prices, it suggests new speculators entering the market.

Total aggregate open interest in gold and silver futures is very close to setting a new all-time record, nearing the previous peak in late 2010. But if we look at what happened the other two times that open interest exploded higher to a new record high during a gold rally, it didn’t lead to an immediate drop in gold. Both times, the rally accelerated before collapsing.




The rally in 2008 lasted about 2 months while the one in 2010 lasted 9 months before the gold market caved in (silver topped about 5 months before gold in 2011). There are a lot of indicators lining up that show extreme positions in the metals at the moment, and that usually means lower prices in the medium-term. Looking at this open interest data, it suggests a similar ultimate outcome but it has been difficult to use for timing.

2016-05-16 | Jason Goepfert | Comments

Traders have been watching the precious metals markets with a wary eye in recent weeks Most traders focus on gold as opposed to silver, so let’s look at a few of the factors that have been worrying those betting on a further rally:

1.”Smart money” hedgers are holding extreme short positions against gold, nearly to a record degree.


2. Speculators take the opposite side of those hedger positions, which means that fast-money traders are net long the metal to a huge degree. That has helped to drive money into the GLD exchange-traded fund.


3. Assets in the fund are now the highest in years.


4. Just as precious metals near a traditionally soft spot in the calendar.


5. Perhaps due in part to those concerns, gold is in danger of reversing from a 1% intraday gain yet again. If it closes lower today, it would be the 3rd time it suffered a 1% intraday reversal from within 1% of a 52-week high in the past month. Other clusters of intraday reversals have led to poor medium- to long-term returns in the past 30 years.



For those looking to establish positions in the metals, it’s a high-risk time, especially if we see yet another reversal today.

2016-05-13 | Jason Goepfert | Comments

The latest Commitments of Traders report showed basically no change from prior weeks in the major themes. “Smart money” hedgers are holding:

  • Massive shorts in gold and silver
  • Some short-covering in the yen but it remains near a record short position for them
  • Decreasing enthusiasm for the grains, especially soybeans which is nearing a record short for hedgers
  • Near-record bets against sugar



2016-05-06 | Jason Goepfert | Comments

The latest Commitments of Traders report showed mostly the same themes as prior weeks. “Smart money” hedgers are holding:

  • Massive (and growing) shorts in gold and silver
  • Growing (but not extreme) positions against non-US dollar currencies
  • Except for the yen, in which they are holding near-record short positions
  • Decreasing enthusiasm for the grains
  • Near-record (and growing) bets against sugar

For gold, their current positions against the metal have been matched only two other times in its history.


Neither one led to a longer-term peak in gold, but both did precede multi-month consolidation. That has been a concern for gold for weeks and continues to be so.



2016-05-06 | Jason Goepfert | Comments

The widely-watched Nonfarm Payroll report has been released, missing expectations by adding fewer jobs than expected, and stocks are showing a minor negative reaction.

Let’s go back and look at other times that SPY gapped down at least -0.5% on a morning that the payroll report missed expectations:


There wasn’t much of an edge there. One interesting wrinkle is that the S&P closed at a multi-week low on Thursday. So how about looking at times when the gap down on a payroll miss occurred after stocks had already sold off to a 3-week low heading into the report:


Here the returns are more consistently negative, mainly because it typically happened during the bear markets, but of course the sample size is painfully small.

Overall it’s hard to read anything into this initial reaction. Future returns have been mixed from the opening print, even during the past five years.

Another notable move is in gold, tentatively looking to gap up more than 1%. The other times GLD gapped up 1% or more on a payroll miss, it continued higher during the day 9 of 11 times averaging a further gain of +0.3%. Its returns following that were perfectly inconsistent.

2016-05-05 | Jason Goepfert | Comments

With utility sector stocks doing so well, it’s no surprise that most members of the Dow Jones Utility Average are trading above their moving averages. The rally has been swift and sustained enough that more than 95% of the stocks in the index are now trading above their 10-, 20-, 50- and 200-day averages.


Dating back to 1990, the Utility Average has been in this broad-based of an uptrend 23 other distinct times (ignoring dates that occurred within one month of each other). The last time it happened was at the end of March, after which utility stocks slid into a pullback.

The chart and table below show the other times this occurred. The Utility Average’s returns in the shorter-term were weak. Up to a month later, Utilities were higher only 9 of the 23 times and its average return was significantly below random. It has been particularly bad over the past five years.

For those looking to get defensive exposure via this sector, it may be best to wait for the uptrend to cool a bit first.



2016-05-03 | Jason Goepfert | Comments

One of the big stories today is in the US Dollar, which is reversing strongly from what had been a new 52-week low:


That looks great on a chart, and sentiment on the dollar is poor. Traders in the Rydex family of mutual funds are among the least-invested in a strong dollar in years:


That’s helping to push the Optimism Index to a low level, but on a longer-term basis it is still in neutral territory. It has a ways to go before we could conclude that sentiment is broadly and universally pessimistic:


At least seasonality is positive. As noted in the Report last night, the dollar has tended to do well in May:


When the dollar hit a 52-week low at some point in May, buying and holding through June gave mixed returns. Out of 7 occurrences, there were two substantial losses, during the extended bear market that lasted from 2001 – 2007. Otherwise, the risk/reward was quite positive:


If we just take a look at the dollar’s intraday reversal, the results weren’t great. Looking at intraday data for a commodity is difficult because of futures contract rollovers, and that’s especially the case for currencies which trade on a nearly 24-hour basis. So price patterns (especially intraday) are suspect and we don’t place a lot of weight on them. For what it’s worth, here is how the dollar has fared after falling at least 0.5% intraday to a 52-week low, then reversing enough to close in positive territory. Shorter-term returns were tepid at best. Up to a month later, there was a definite negative skew:


So we have a situation where the dollar is showing a strong reversal (so far) from what had been a new low, speculators are betting fairly heavily against it and seasonality is positive. A nagging factor is that one-day reversals from a low have had a poor record at preceding further rallies. We’d be more inclined to bet on a dollar rally if the Optix were more extreme and the reversal stats were (much) more positive. As it stands, there is only a modestly positive case for a rally based on the measures and type of price activity we follow.


2016-05-03 | Jason Goepfert | Comments

According to BofA, private clients have been heavy sellers. This has been a good non-contrary indicator over the past decade, with generally poor stock performance following heavy selling and rallies following heavy buying. Not good.

(Source: ZeroHedge)

They also show that Wall Street is still negative on stocks. We’ve discussed this indicator in the past and put very little weight on it. It is made up of only a handful of strategists’ target allocations, and one particular strategist with a very low suggesting equity allocation can (and is) skewing this data lower. We would not consider this to be a factor at all.

(Source: ZeroHedge)

Clients of FXCM brokerage are heavily short the S&P 500. This index has a short history but provides a real-money look at how speculative traders are positioned. Curiously, it has been more of a non-contrary indicator, with large long positions corresponding well with price lows and vice-versa. The fact that clients are so short currently is a negative.

(Source: FXCM)

Nervousness among investors (or advisors) is also causing a persistent flow of money into minimum-volatility funds like USMV. The knee-jerk reaction is to assume that this nervousness on the part of investors is a good sign, but history for these funds is too short to form any conclusions. The only other time the fund had a large, persistent inflow was in the spring of 2013. After that point, the fund struggled even while stocks continued to rally and investors rotated into higher-volatility stocks. Not sure what to make of that.








2016-04-29 | Jason Goepfert | Comments

For the first time in a couple of weeks, the tech-heavy Nasdaq Composite index has traded below its 200-day average. The simple technical indicator is often used as a filter to determine whether a market is in a bull or bear market environment.


Since its inception in 1971, when the Composite was above its 200-day average (which accounted for 68% of the days), it advanced at an annualized 16.9%. When it was below its average, it returned an annualized 0.0%. In other words, it didn’t pay to be invested in tech when it was below its long-term average.

Let’s go back to its inception and look for other times that it crossed below its average for the first time in at least two weeks, and the average was flat. This gives us dates when the trend has been range-bound, and the index started to decline.


The results are a bit troubling but not disastrous. Up to three months later, the index was negative as much as it was positive and while it sported a positive average return, it was well below random. There was wide variability among the returns, however, which is why the “Relevance” figure is relatively low. There were some massive gains among the precedents along with some massive losses.

Overall, we’d consider this to be an indicator of an unfavorable market environment, but not enough to be an outright sell signal.

2016-04-25 | Jason Goepfert | Comments

The biggest challenge in analyzing markets today is separating wheat from chaff, signal from noise. The vast majority of the time, what we see, hear and read is noise. And most of that is geared toward fear.

A prime example is the recessionary doomsaying that peaked in February. It was easy to find an indicator that had signaled recession every other time it triggered, meaning we were heading into recession this time as well.

That’s why we prefer taking a model-based approach. It limits the danger of finding only those indicators that happen to agree with our preconceived notions.

We shy away from economic data because it has proven to be less useful than others in terms of practical application to the markets. But a chart making the rounds today deserves special attention because it perfectly highlights the challenges we all face when consuming any kind of media.



Industrial Production has dropped 3% over the past 16 months. That happened as stocks were peaking prior to the last two bear markets. That’s where most of us stop reading and add it to the pile of reasons to be fearful.

But let’s go a step further and look for every other time since 1930 that the indicator suffered a 3% loss over the preceding 16 months.


Here are the returns in the S&P 500 going forward.


It’s important to look at everything in context. Surely, this could be a repeat of the last two bear markets. Is that the most likely case, based on this particular indicator? While we do place more weight on recent history as opposed to something from 60 years ago, the suggestion from prior returns would be…no.

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