sentimenTrader Blog

2016-02-26 | Jason Goepfert | Comments

In the Daily Reports and these Notes, we’ve focused on two major themes:

  1. The “gappy” nature of the market over the past couple of weeks has typically been a good medium-term sign of excessive uncertainty and buying demand.
  2. A market that continues to rally in the face of excessive short-term optimism almost always sees even further gains in the medium-term.

Both conditions are in force this morning, as stocks are indicated to gap up at least 0.5%, though that is off the earlier indicated gains. And the Short-Term Optimism Index closed above 80 on Thursday, a clear sign of excessive optimism.

Since 2000 there have been only 7 other days when the S&P gapped up at least 0.5% after the previous day’s Optimism Index was above 80. Returns over the next two weeks were interesting.


Of the 7 occurrences, 5 of them occurred during the thrust off the bear market low in 2009. Outside of those instances in March 2009, the S&P struggled to maintain any further short-term gains. If we exclude those March dates, the S&P’s maximum gain averaged only +2% versus a maximum loss of -5%.

So, once again, the idea is that stocks should decline, or at least plateau, from these conditions when looking out over the short-term of at least several days. But if it doesn’t, then it should pay to be even more aggressive in the medium-term as the probability of further gains increases.

2016-02-19 | Jason Goepfert | Comments

Following is a quick snapshot of the latest futures positioning data from the CFTC. These are positions for the large commercial hedgers that we show in the interactive versions of the charts on the site.

The most notable change was in silver, where hedgers are now holding their most aggressive short positions since 2008. This is not always useful – it gave a bad warning sign in 2010 – but overall tends to be accurate. When commercials are heavily short a commodity in a downtrend, it has most often had difficulty sustaining higher prices, and they’ve been more aggressively shorting silver on each rally attempt over the past few years. As always, this could be misleading but it looks like the risk on silver just went up.




2016-02-18 | Jason Goepfert | Comments

Stocks are on track for yet another gap up opening today, marking the fourth consecutive positive open.

Since the inception of index futures in 1982, the S&P has never gapped up at least +1% for three consecutive sessions then gapped up at least 0.25% on the fourth. It happened after three gaps of at least +0.5% six times and at least +0.25% twenty-one times, shown below. The gaps that were at least +0.5% for the first three days are shown in bold.


The most consistent performance in the S&P was over the next two days, when weakness prevailed (returns are from the open of the 4th day to the close two days later). The risk-to-reward ratio was about even, suggesting that the downside edge was not great, but in terms of new buys – traders rushing in to chase the short-term gains – it was a poor bet way more often than not.

Of the six times that the gaps were at least +0.5% during the first three days, the next two sessions lost ground all but one time, though it’s harder to draw a conclusion there because of the small sample and clustered dates.

This is just more confirmation of what we looked at yesterday, that short-term blasts like this give back some of the gains over the next several sessions an overwhelming amount of the time.

The exceptions are typically times when we’re emerging from medium-term pessimism and about to embark on multi-week to multi-month rallies. As always, we’ll be considering that here as well, meaning that we’re looking for short-term weakness and if we don’t get it then it adds to the probability that we’ll see even higher prices in the coming weeks.


With my personal portfolio that I show on the site for transparency purposes, my typical time frame is medium- to long-term so I tend to avoid very short-term adjustments. While reducing exposure to stocks here seems a little “cute”, the fact is that we’re seeing excessive (short-term) optimism in a downtrending market, so I prefer to reduce exposure in those cases. The risk, and it’s substantial, is that this is one of the exceptions, buyers continue to plow in, and I’m left with less exposure than desired longer-term, leaving me to chase prices higher. So no major adjustments here, I’ll just be looking to reduce exposure from ~46% to ~40%.

2016-02-17 | Jason Goepfert | Comments

Heading into the last 1/2 hour of trading, we are seeing a spike in several of the short-term indicators that had been holding out the last couple of days. That is likely going to push the risk level up to 8 for the short-term.


There is still a surprisingly large focus on put trading and inverse ETFs as traders are not giving up the ghost in terms of hedging activity. During past rallies, these were just as likely to move to extremes as the other indicators, and it’s not happening this time so the risk level is lower than it would normally be.

Over the past year, stocks have had great difficulty maintaining short-term momentum with a risk level of 8. The only real exception was in early October last year. As we always note, when a market is emerging from medium-term pessimism and continues higher in spite of short-term optimism, it is an excellent signal for further gains over the following weeks, and it’s something we’ll be watching for here.

Besides the headwind from the short-term optimism, there is also the issue noted before the open today related to 3 days in a row of large gaps.


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.

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