sentimenTrader Blog

2015-12-09 | Jason Goepfert | Comments

On a daily basis, we look through ETFs that are trading at premiums and discounts to their Net Asset Value.

Several times over the years, we’ve looked at these disconnects as short-term opportunities. It’s not unusual for closed-end funds to trade several percentage points away from the value of their underlying securities, but it is for exchange-traded funds because of their structure and opportunities for arbitrage.

Most days, there isn’t anything outstanding. If there is a fund that trades away from its underlying value, it is usually minor.

One standout today is the Pimco 0-5 Year High Yield Corporate Bond fund (HYS). As the name implies, it holds short-term high-yield debt.

And that is NOT something traders are wanting to hold at the moment.

The discount on the fund just dropped to -0.84%. That doesn’t sound like much, but it’s among the largest in the fund’s history.


The last two times it traded at such a distressed price relative to its holdings, the fund rebounded strongly over the next month. The time prior to that, it jumped over the next couple of days then plateaued before suffering another plunge to its ultimate low.

ETFs are coming under scrutiny for holding illiquid securities that may be hard to price, and that’s likely part of the reason for this discount. But it looks to be reaching panic proportions in the short-term.

2015-12-09 | Jason Goepfert | Comments

The last thing a company wants to do is cut its dividend.

Steady and rising dividends are a sign of a healthy, responsible company (at least that’s what we’re usually led to believe). Lowering that payout to shareholders or – GASP! – suspending it altogether is a sign of desperation.

And that’s what we’re seeing now with mining and energy companies.

The latest unhealthy, irresponsible company is Anglo American, which despite its name is actually listed in London. The firm announced that it is suspending its dividend and cutting its workforce. Oof.

Here’s a tidbit from the Financial Times:

Anglo American, the mining group, has defended a decision to scrap dividend payments and cut 19,000 jobs round the world, saying the moves were necessary for the business to survive “horrendous” market conditions.

But that wasn’t from this morning. That quote was from February 20, 2009. This isn’t the first time Anglo American has resorted to these measures to save the company.

The company’s shares lost 17% that day and 25% over the next 8 days. But this is what it looks like on a long-term chart:


That month marked the bottom in the company’s shares, rallying 285% over the next two years.

The broader gold mining sector had already bottomed by that point, but still rallied heartily in the months ahead.

Desperate measures like this are scary and upsetting to shareholders, but it is necessary for the long-term survival of the companies and industries. A raft of such announcements typically mark the trough, or nearly so, of the down cycle.

2015-12-08 | Jason Goepfert | Comments

The Wall Street Journal published an article today about the free-falling price of bonds for many energy-related companies. Stock and bond prices have been falling by 5%-15% a day in some of these issues.

As a result, the probability of default is rising.

But the thing about that is that it is backward-looking. The probability of default doesn’t rise until a company is in trouble, and it soars when panic is in the air. Sometimes that’s right, but most often it is not.

There is a sense that “everyone” is trying to bet on a bottom in oil. That is demonstrably false by almost any measure that looks at actual money flows. There have been more puts traded versus calls on USO over the past two weeks than almost any time in that fund’s history. Money managers are holding the fewest number of contracts in crude in more than five years.

Regardless, one of the companies mentioned in the Journal piece is Consol Energy (CNX). It has the double-whammy negative of being involved in energy and mining.

The stock is more than 85% off its recent high and the probability that it’s going to default is nearing its highest level since 2000.

That’s the interesting thing. Look at the other two times it fell 75% or more from a high, and the default probability rose to 2% or higher. Both marked a general bottoming area for the stock.


We know nothing about the fundamental properties of this stock or industry. It’s just at a notable juncture sentiment-wise on a long-term time frame that is being echoed by a number of different stocks in this sector.

2015-12-08 | Jason Goepfert | Comments

Here’s an interesting tidbit. The S&P 500 is currently indicated to open more than 1% below where it closed on Monday.

Opening gaps are often suggested to be “dumb money” traders reacting to overnight news events. For the most part, historical studies support that characterization.

Big negative gaps are unusual in December, typically a positive time of the year, though as we’ve often discussed the middle part of the month tends to be mushy – it’s the latter half that’s the good stuff.

Let’s go back to 1982 and look for every time the S&P 500 futures or ETF gapped more than -1% below the prior close in the first half of December (before December 15). We’ll buy the open and sell it at the close on the third trading day in January.


This takes advantage of two tendencies, for gaps to be filled and for positive seasonality in the latter half of December to take effect. Out of 14 trades, 13 gave impressive positive returns. The only loss was the last one, which dents this a bit (we place more weight on recent occurrences).

Notice, however, that the drawdown could be severe. The Max Loss column was hair-raising at times, because we usually saw these kinds of gaps during bear markets.

We’d never suggest using this to trade mechanically, but rather as an indication that short-term emotional weakness this time of year tends to get reversed in the latter half of the month.

2015-12-07 | Jason Goepfert | Comments

Based on preliminary figures, today’s session will push the Short-Term Optimism Index down to 39, from 71 on Friday. The Risk Level is poised to decline to 4, from 6 on Friday.

Again, these are preliminary and could change depending on how stocks do into the close and what the final figures are.

Since the August panic low, stocks have had a habit of responding well when the Optimism Index declines below 40, though the bigger the extreme the better and this is just barely.

Biggest holdouts are Inverse ETF Volume, which has barely budged, and the Cumulative TICK, which isn’t showing any big sell programs.

On the extreme side, put/call volume in equities is extremely skewed toward puts, with intraday CBOE data showing almost an equal number of puts vs calls traded, something that has preceded prior lows.


A mixed picture, but we’d prefer to see it get more extreme in this whip-saw market.

2015-12-07 | Jason Goepfert | Comments

The U.S. Oil Fund (USO) has been a poor product almost from the get-go, as it struggles to track the price of crude oil while battling the long-term effects of contango.

With oil taking another beating today, USO is getting hit especially hard, off nearly 6% so far on Monday.

That has pushed the fund below its lower Bollinger Bands, one of the few technical indicators we regularly watch. It’s a handy measure to see check how unusual a move is given its recent history.

It’s unusual to see a fund trade at both a new 52-week (at least) low and below its lower Bollinger Band. It shows that traders are especially eager to purge themselves.


Figure 2 shows the returns in USO over the next days and weeks if investing $100,000 in USO when it closes at a 52-week low and below its lower Band.

Even during its mostly horrid history, the fund has had a tendency to snap back over the next 1-2 days. After that, not so much. There are some longer-term reasons to expect this move to be exhaustive (such as the latest Commitments of Traders data) but the price action so far is giving little comfort to those expecting it.


2015-12-04 | Jason Goepfert | Comments

The just-released Commitments of Traders report showed more of the same trend as in past weeks.

Money managers have gone to an even larger all-time extreme against gold (positions are as of Tuesday’s close).


Same for crude oil. Both commodities have a history of responding in a contrary way to extremes like this, suggesting a risk/reward that’s skewed to the upside for the coming weeks/months.


At the other end of the spectrum, they’ve neared a five-year high net long position in sugar. The last two times their position exceeded 150,000 contracts, sugar was forming a peak.


2015-12-04 | Jason Goepfert | Comments

The Nonfarm Payroll report showed a positive surprise in job additions, leading to a minor bump up in equity futures.

Over the past year, there have been 6 other positive surprises, three of which also led to gains in S&P 500 futures in the immediate aftermath of the next 5 minutes.

NFP Surprise Reaction

Curiously, here are the full-day returns for those dates:

2015-03-06: -1.4%

2015-02-06: -0.3%

2015-01-09: -0.8%

All three also continued to sell off in the days afterward.

2015-12-03 | Jason Goepfert | Comments

Wednesday’s release of asset levels in the Rydex family of mutual funds showed a sudden willingness to bet on a further market rally.

Total assets in the bull funds (that bet on a market rally) jumped by more than $62 million to the third-highest level of this bull market. The other two times in neared this level were prior to short-term peaks in stocks.

At the same time, bear funds (that bet on a market decline) lost more than $52 million in assets. One minor positive is that this is still not extreme, as bear assets had tumbled much further earlier this year.


The sudden shift caused our shorter-term indicators to record extremes. The Beta Chase Index tells us that these traders are now 6 times more likely to buy into a higher-risk fund than a lower-risk fund. Again, something normally seen before some short-term trouble. It also caused the RSI Spread to reach +100, basically meaning an all-out switch from bear to bull funds over the past five days.



2015-12-02 | Jason Goepfert | Comments

The horrid events in San Bernardino coincided with a pick-up in selling pressure in stocks. Based on similar nightmares, that is likely nothing more than coincidence.

The excuse was most probably a statement by Fed Chairwoman Yellen, but whatever the reason, the S&P 500 is putting in an outside negative reversal.

Previous reversals have had the most consistent returns two days later, when SPY had trouble rising after the down day, as we can see from Table 1.

SPY Reversal

Assuming this holds into the close, it argues for a modest negative bias in the short-term.

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