sentimenTrader Blog

2016-04-01 | Jason Goepfert | Comments

Anyone watching fund flows in recent weeks or seen the blurbs in the Daily Report would know that investors have been moving into emerging markets and out of some commodity funds.

Preliminary totals for March are in and confirm what the weekly readings have been suggesting. For the month, EEM took in $4.5 billion, its 2nd-highest monthly intake since at least 2004. Only December 2012 was higher with an inflow of $5.2 billion.

Gold was a big winner on the month, resulting in an inflow of $2.2 billion to GLD. Bond funds took in a lot of assets as well, with JNK, LQD and HYG all taking in more than $1 billion.


The following chart shows the monthly flows as a percentage of their 3-year range. We can see that EEM, EWC (Canada) and EWA (Australia) all took in their most assets in at least 3 years in March. Losers were EWJ (Japan), USO (Oil) and XOP (Oil Services), which suffered their worst outflows or lowest inflows in at least 3 years.


The top two funds relative to their 3-year range are shown below.


And the bottom two.


Fund flows are a little tricky to use with some funds because shares can be created for shorting purposes and do not strictly reflect buying demand. But for the most part, we consider flows to be a contrary indicator when they reach an extreme, suggesting some caution for the funds with largest inflows and a chance to search for bottoming action in the funds with largest outflows.

2016-03-30 | Jason Goepfert | Comments

Among the best gainers on Tuesday were telecom companies, with many of them up 2% or more. Most telecom funds are now up 20% or more from their lows.

That performance has driven all five members of the S&P 500 Telecom sector above their short-, medium- and long-term moving averages.


This happened earlier in March but other than that it’s been a couple of years since every member was in gear to this degree. Historically, that has led to some rocky returns in the short-term of a week or less, but then momentum took over.


A month later, the sector was higher 10 out of 14 times with a median return nearly triple a random return. There was one loss of more than 10% in 1996 as the surge marked the exact peak, but other than that, any shorter-term weakness was erased as buyers who missed the initial surge piled back in.

2016-03-24 | Jason Goepfert | Comments

The trading session before Good Friday tends to be positive (less so in March) but the futures are indicating a relatively large gap down open of more than 0.5%.

It’s unusual to see a largish gap down before a holiday, because volatility tends to be lower as many traders have left early and there just tends to be an overall positive bias ahead of the break.

There have been 34 times since 1993 that SPY opened with a loss of at least 0.25% on the day before an exchange holiday, and somewhat surprisingly it tended to lead to more losses into the close. Only 15 of them managed to close higher than the open and only 6 of them closed higher than the previous day’s close. This suggests a headwind for those betting that stocks will rise above Wednesday’s close.


There were only two times it happened before Good Friday, in 2001 and 2012. Both of those happened to show gains, and neither one lost more than 0.3% from the open. We can’t read much of anything into a sample size of two.

We’d consider this a minor negative for the day, and as noted in yesterday’s Report the day after has had a negative tendency as well. Seasonality is a very minor consideration but it appears to be a headwind at the moment.

2016-03-18 | Jason Goepfert | Comments

There was not much change in positions for “smart money” hedgers in the latest Commitments of Traders report, covering trades through Tuesday.

Most of the contracts saw a slight reversal of previous extremes, with no moves that were especially notable. In cotton, mentioned last week as well, they continued to add to their near-record long position. They are currently holding more than 32,100 contracts net long, slightly exceeded only by November 2004 and November 2006 in the contract’s history.



2016-03-16 | Jason Goepfert | Comments

The knee-jerk reaction to the FOMC decision and statement was positive. Stocks gained on the news and are currently trading at new highs for the recovery.


Let’s look at each of the days the FOMC announced their decision on rates since 2013 when they moved to a 2pm release. We’ll look at SPY to see if it gained or lost in the first 1/2 hour after the decision, and then how it performed after that first half hour into the close and then the next day.

First, when it gained:


Returns were mixed to slightly positive, both into the close and the next day. There were two days in 2013 when it reversed modestly into the close, but overall the losses were limited. The next day, there were two losses of more than 1% but overall the skew was modestly positive.

Now for when the knee-jerk reaction was negative:


Returns were not as good here. There were a couple of large positive reversals into the close, but overall the tone was negative, including into the next day.

Overall, this would hint that the positive initial reaction we’re seeing today is a (very) minor positive for short-term bulls, or at the very least, not a negative as traders have not consistently reversed the initial thrust after prior occurrences.

2016-03-11 | Jason Goepfert | Comments

The just-released Commitments of Traders report showed mostly modest changes in most contracts, with the same general theme as the last couple of weeks. Hedgers remain heavily short precious metals, particularly silver, and long grains, particularly wheat.

One change that has been gathering steam is in cotton. This is not a popular contract, but hedgers just exceeded a 27,000 net long position. In the history of that contract, just an extreme has been a good medium- to long-term long signal. At its worst point over the next six months, cotton lost a median 4.7% but at its best point gained a median 11.5%. There was really only one failure to precede a rally, in May/June 2004.

There is a lack of interest in cotton products, but there are three ETFs that have a sole or heavy weighting, BAL CTNN and JJS, all of which have very little volume, but they may at least be interesting to watch over a 3-9 month time period.



2016-03-11 | Jason Goepfert | Comments

Stocks are on a tear yet again, with most broad indexes up close to 2%. As noted ad nauseam in the Reports over the past three weeks, when a market does not react to short-term extremes, it’s telling us something about the medium-term and we’re seeing that again on a real-time basis. Even as the risk/reward has evened out lately from what had been a positive skew, this kind of momentum does not die easily.

That doesn’t mean we won’t see short-term gyrations, and today’s push looks set to trigger some extremes that tend to lead to very short-term weakness.

An example is that the S&P is gaining more than 1% to a multi-month high while below its 200-day average (though it may rally enough to close barely above it). When that happens, if we buy the next day’s open and hold for two days, the returns were terrible.


There were only 4 winners out of 24 trades, and the risk/reward was skewed 3-to-1 to the downside. When it happened on a Friday, there was 1 winner out of 6 occurrences, averaging -0.4%.

Even if we do cross the 200-day average, that hasn’t been a great buy signal in the very short-term. Since 1957, stocks have struggled immediately after crossing above. In the past 40 years, the S&P dropped back the next day 10 out of 14 times.


This is all very short-term and says nothing about the medium- to long-term. Most of what we’ve looked in the past week or so has started to see more negative returns in those time frames but not enough to be overly defensive just yet.

2016-03-10 | Jason Goepfert | Comments

Buyers are coming in hard this morning, ostensibly due to further measures announced by the ECB. Whatever the reason, futures are indicated to open more than 0.75% higher than Wednesday’s close, which would be a two-month high.

Using the S&P 500 fund, SPY, there have been 64 times it has shown such a gap. From the open to close, the S&P added to its gains only 41% of the time, averaging -0.3%. When it was below the 200-day average, it gained 6 out of 14 times, averaging -0.4%.

When this occurred below the 200-day, the only times the S&P was able to maintain any substantial gains over the next several sessions were in October 1998 and April/May 2009, as stocks were emerging from steep sell-offs. As always, if stocks can continue to shrug off probabilities like this and power higher, it adds to the evidence of even higher prices in the medium-term. Futures are fading a bit as this gets published, but even if the opening gain is above 0.5%, the short-term stats were similar to the above.

The rally has taken hold among individual investors, with the latest survey from AAII showing that bullish sentiment has doubled from the lows. The Bull Ratio was at a lowly 28% a month ago compared to 61% as of today’s release.

This isn’t necessarily a bad thing. Increasing bullishness is good for markets, as long as it doesn’t get too bullish.

Going back to the survey’s inception, here are the returns in the S&P when the AAII Bull Ratio doubled over a one-month period:


Two months later, the S&P was higher 12 out of 13 times, averaging a healthy gain of 2.9%. The sole loss was small and quickly reversed in the weeks following. This is also one of the smaller Bull Ratios in the table, adding a bit to the positive tone.

There were five other weeks (in 1988, 2000, 2008, 2009 and 2013) when ratio had been at its lowest level in a year before it doubled, not including our current instance. Returns going forward were in line with the others, showing no additional bullish inclination.

The gap open does not look promising for those looking to chase short-term strength, but again we’re seeing the kind of activity that is associated with momentum markets, and those rarely just roll right over into medium-term declines.

2016-03-09 | Jason Goepfert | Comments

As we near the middle of the month, it’s interesting to note that several markets are bucking their typical seasonal patterns.

Seasonality is a minor consideration, especially in stocks, but it’s worth checking to see if there are any especially consistent patterns or months that tend to generate outsized returns.

The table below looks at most of the commodities we follow, ranking them by Optimism Index and including their average March return. Markets that are showing pessimism but with positive seasonality are highlighted in green while those that are showing optimism with negative seasonality are in red.


The most notable are natural gas and the grains. They currently have deep pessimism but tend to perform well this time of year. At the opposite end are the precious metals and sugar (which tends to perform poorly in April as well).

Here is the same screen for ETFs. This is using the raw daily figure, which can be noisy.


The most interesting development here is in bonds, with high-yield funds showing modest pessimism yet with positive seasonality, while investment-grade bonds are showing optimism with moderate negative seasonality. That would hint that high-yield funds would outperform their “safer” cousins in the coming weeks. A caveat there is that fund flows to high-yield funds have been on a tear, which has preceded weakness in the past. Not an ideal setup.

2016-03-04 | Jason Goepfert | Comments

The latest data from the CFTC is out and shows some slight movement in futures positions.

Hedgers relaxed their shorts against silver by a bit, but continue to hold nearly a five-year extreme against the metal. They increased their bets against gold, nearly to the most extreme in three years.

At the opposite end of the spectrum, they increased positions in cotton and (especially) wheat, with the latter at a new record long position for hedgers.



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