sentimenTrader Blog

2016-01-20 | Jason Goepfert | Comments

Another morning, another large opening loss.

The S&P 500 futures are indicated to open down more than 1.5% below Tuesday’s close, marking the 5th opening gap of -1.5% or more in 12 days. In the history of S&P futures, only three time periods had this tight of a cluster of large negative opening gaps:

  • Late October 1987 (aftermath of Black Monday)
  • October-December 2008 (aftermath of the financial crisis)
  • March 2009 (bottom of bear market)

There were several time periods that saw 4 gaps in 12 days, all medium-term bottoms:

  • November 7, 1997
  • September 21, 1998
  • June 4, 2010
  • August 19, 2011
  • September 19, 2011

Clearly, an unusual situation. What’s also notable about today’s indicated open is that it is occurring when sentiment is already panicked.

Like recession indicators, we could pick and choose among hundreds of indicators to confirm whatever we want to suggest, but we always try to most heavily weight model-based readings. These are objective, not subject to cherry-picking and proven in real-time through market cycles.

As of Tuesday’s close, the spread between the Smart Money Confidence and Dumb Money Confidence was +49%, down a bit from the previous day.

Figures 1 and 2 show the performance of the S&P futures from the opening print on any day that they opened down at least -1.5% and the Confidence Spread was +45% or greater.

20160120_gap_chart 20160120_gap

Same-day performance was mixed, but improved dramatically as we moved out the time frame. The only real failures were in June 2002 and during the midst of the October 2008 collapse.

The highest-probability risk at the moment is if the major indexes, primarily the S&P 500, move below its August lows. That could trigger a round of stop-loss orders during the day and bleeding into the next 1-2 days. Margin call selling is a small possibility. A quick loss of an additional 5%+ would not be out of line in that case and if we saw anything like that, then there would be an exceptionally high probability of higher prices over the next several weeks to several months.

The safer bet in kinda-sorta panic situations like this would be to wait for the S&P to exceed the high from the previous day, about 1900 in our current case. That is not foolproof by any means, but it does tend to capture most of the upside of these rebounds while preventing one from buying into a possible collapse. The risk in those cases is that one is buying into rising prices in a downtrend, subject to reversal, so (wide) stop losses are recommended.

2016-01-16 | Jason Goepfert | Comments

A big concern among technically-oriented traders is what looks to be a pending breakdown from a rounded top formation. Many also point out a potential head-and-shoulders formation.


Technical analysis has never proven to be consistently predictive, partly because it is subjective. There are a lot of “it looks like…” types of statements when discussing formations, making it difficult to quantify and test.

That doesn’t mean it isn’t without merit. The whole point of that branch of analysis is a focus on what is happening right now, without the assumptions and forecasts that fundamental analysts make. So in terms of stripping away a lot of B.S., technical analysis serves a purpose.

Should we be concerned if stocks break down? After all, we saw a similar pattern play out in 2000 and 2008. Stocks rose for years, suffered a volatile back-and-forth few months, then broke down and fell into bear markets.

We are conditioned to put the most weight on recent occurrences, which is valid up to a point. Past that point, we become blinded to other possibilities.

Let’s go back as far as we can, to 1896, and look objectively for other instances like we’re seeing now, and in 2000 and 2008. We’re looking for rising prices for a year or more, followed by a rounded-top, head-and-shoulders type of formation.

This is inherently subjective, but I’ve been studying chart formations for 25 years. Even so, anyone with even 5 minutes of instruction on what to look for should point out most of the same time periods.

Figure 2 shows every similar occurrence in the past 120 years. There is a “Before” snapshot, and try to look at that first. Look at the far right edge of the chart and think about how scary it must have felt if you were experiencing it in real-time.

The “After” snapshot extends the chart out over the next 2-3 years, so we can see the implication if we had sold when stocks broke down.


We would have felt really good about ourselves in 1930, 2001 and 2008 as stocks collapsed. We would have temporarily felt good in 1903, 1957, 1962, 1966 and 1984. We would have felt pretty stupid about panicking in 1949 and 1992 as stocks bottomed almost immediately and roared to new highs.

The “temporarily smart” instances, which comprised most of them, fell an additional 10%-20% from the breakdown point over the next 2-6 months (generally).

The most consistent factor among the worst losses was persistent selling pressure from the breakdown level. That’s the key to watch for – if stocks do break down below the August lows, and buyers show no interest in stepping in, then it makes sense to expect even more pain in the months ahead.

But a multi-year bear market that erases 40%-60% of market value? Not likely, especially if relying on some picture of a chart that happens to look like a couple of recent occurrences.

2016-01-15 | Jason Goepfert | Comments

Another morning, another large gap open.

For 8 out of the past 10 days, investors have started the session with prices far removed from the prior day’s close. All but two sessions began with the S&P 500 futures showing a pre-market gain or loss of more than 0.5%.

When this occurs with an open that’s at the lowest point of the past three months, it has signaled either the middle of a waterfall decline (2008) or the end of an exhaustive move (every other date).

It’s also extremely rare. Since the futures began trading in 1982, it hadn’t happened until 2001. All occurrences were clustered between 2001 and 2011 (Figure 1).


Figure 2 provides the dates along with the S&P’s returns going forward. The returns are from the open of the 8th gap out of 10 days, when that open was at a three-month low in the futures.


This is nothing different from other studies in prior days. The kind of oversold reading and price jumpiness we’re seeing has led to binary outcomes – either we’re in the midst of a crash, or this is the end-game volatility as stocks are putting in a multi-week to multi-month low.

Given the recession probability noted in yesterday’s Daily Report, and the fact that (so far) the S&P is holding above its  August lows, we’re still giving more weight to the latter scenario.

2016-01-14 | Jason Goepfert | Comments

One of the data points that will likely get some attention today is a collapse in bullishness among the individual investors who participate in a weekly sentiment survey published by the American Association of Individual Investors.

For the results included through Wednesday, only 18% of respondents are anticipating higher stock prices over the next six months. That’s the lowest figure since April 2005. Even during the grips of the 2007/2008 bear market, there were more optimistic investors than there is now.

The bulls are only one side of the equation, however. AAII also measures the percentage of bears, which stands at 46%. That figure regularly pushed above 50% during the bear market.

Our preferred measure for this survey is the Bull Ratio (Bulls / (Bulls + Bears)), which takes into account both the bullish and bearish respondents. That ratio just dropped to 28%, the lowest since 2013.


Figure 2 shows the results in the S&P 500 after every week in which the Bull Ratio was below 30%.


In the medium- to long-term, results were excellent. Three months later, 26 out of 29 weeks showed a positive return, doubling a random return during the study period. It continued to improve over the ensuing months with the only losses occurring during the 2008 bear market.

2016-01-13 | Jason Goepfert | Comments

Whenever stocks are oversold and start to sell off even more, then it is a truism that we’ll hear the cliche:

Markets crash when they’re oversold

It happened on Black Monday in 1987, so…sure, it happens. Anything can and does happen in the markets. But is it a good bet?

Selling short a market that is already oversold, betting on a catastrophe, can pay remarkably, especially if using put options to speculate on the crash. The put buyer gets the double-bonus of the put getting more and more in the money, along with the super-charched addition of higher implied volatility.

Defining “oversold” is open to opinion, so let’s go back to what we almost always do in this case – the 10-day average of the NYSE Up Volume Ratio. As of Tuesday, it closed at 34%, already deeply oversold.


Now we’ll look for any date since 1940 that the ratio was below 35% and then the S&P 500 sold off 2% in one day (it’s just below that currently). Surely this is a pre-crash setup if ever there was one. After all, it occurred in October 1987 the day before the big crash.


As we can see from Figure 2, 1987 was the exception (no surprise there). In fact, out of 30 occurrences, only 9 of them led to lower prices over the next month. And only four of those were larger than a 2% loss. In the past 40 years, there was only that loss from Black Monday and then another minor loss from later that October.

It’s never good to be cavalier about markets. We could drop 10% tomorrow. But counting on the idea that we might crash because we’re already oversold is an idea anchored on one horrific incident, ignoring the many times it not only didn’t lead to a crash, but to significant gains.

2016-01-12 | Jason Goepfert | Comments

We’ve touched on the so-bad-it-might-be-good sell-off in crude oil a few times over the past year. Usually it was good for a short-term reprieve at best.

Overall, that market has not responded, which is a good sign to stay away. Markets that don’t do what they should are in great danger of doing more of what they shouldn’t.

It’s awfully tempting to look at these big down days and think, “This must be it, it can’t possibly keep going like this.” Sometimes that’s the right line of thinking but it’s not consistent enough to pay for the times it fails.

There are surely some compelling signs. Crude is on the cusp of falling for the 7th straight day, closing at a new low. Other instances have usually led to a short-term bounce (Figure 1).


Same goes for when it suffers a 2% down day nearly every day for the past six sessions (Figure 2):


Money managers have been abandoning their long positions in oil futures:


Which is helping to trigger one of the highest volatility readings in a decade:


Which is also causing one of the highest levels of contango we’ve ever seen (shorter-term futures trading at a discount to longer-term futures):


All of these point to higher prices, at least in the shorter-term. Whether this is “it” longer-term is a bad bet, at least in terms of sentiment and price patterns – we have no opinion on any fundamental or economic aspects.

The selling is clearly extreme but it has been for a while. The market is broken and that means there is low confidence in any medium- to long-term risk estimates.


2016-01-11 | Jason Goepfert | Comments

The major equity indexes are looking at another loss today, after a rough week last week.

This brings up the possibility of the Turnaround Tuesday phenomenon, which is related to the tendencies noted earlier about markets more frequently bottoming on Monday/Tuesday than other days of the week.

Figure 1 shows the returns through the rest of the week and in the weeks ahead when the S&P 500 lost at least -5% last week and closed at a 3-month low, then declined by any amount on Monday.


We can see that returns over the next several days were better than average. Figure 2 shows them since 1962.


Again, better than average returns and more consistent this time. There were two losses of note, in 1974 and 2008, both of which happened to be in the final “puke” phases of a bear market and not similar at all to where we are now in terms of market structure.

Out of all the occurrences from Figure 1, there was only one other than occurred when the S&P was within 10% of a 52-week high, which was the one from August 1943. That proved to be a bottom and the S&P rallied about 6% over the next few months.

There were four others that occurred within 20% of a 52-week high, from October 1929 (preceding a loss of more than 30%), August 1943 (noted above), August 1998 (preceding gains of +25%) and August 2011 (preceding gains of +15%).

Overall, mostly positive but not a slam-dunk.

2016-01-11 | Jason Goepfert | Comments

The theme lately has been gaps, and we’re starting off the week with another.

We’ve mentioned many times in the past that the tendency for markets is to form medium-term (1-3 month) bottoms on Monday/Tuesday. It’s rare to see them form on Fridays.

It’s just a tendency, but still it has been twice as likely to see a low on Monday than Friday. For that to hold true this time, it would mean we have to close lower today or tomorrow than we did on Friday.

Figure 1 shows the returns in SPY every time it gapped up at least 0.5% on a Monday after it had closed at a 3-month low on Friday.


We can see that it tended to add to the gains during the day, closing higher than the open 7 out of 10 times. This was drawing in buyers who were worried that they missed the bottom.

In the shorter-term, their buying panic didn’t tend to pay off. The S&P reversed and closed lower on Tuesday 7 times and that tended to persist for a couple of days. Returns in the short-term were quite weak.

Again, this is just a pattern-based tendency that suggests chasing potential strength on Monday will be a challenge in the days ahead.

2016-01-07 | Jason Goepfert | Comments

With many funds getting hit hard today, there are a number of new extremes in the Optimism Index for the ETFs that we track.

Here is the list based on preliminary pre-close numbers. It could change somewhat if there is a late rally or the final numbers are adjusted after the close.


2016-01-07 | Jason Goepfert | Comments

In terms of panicky opens, we’re now in rare territory.

Since the inception of the S&P 500 futures market in 1982, we have rarely seen such a concentrated period of traders selling so heavily before the open of regular trading. Typically this is seen during instances of worries about market structure (e.g. the flash crash in 2010, Black Monday in 1987) or global financial meltdown.

Barring a large recovery into the open, this will be the third opening gap of -1.5% or more in four days. The only times we’ve seen this kind of opening pressure were during the 1987 crash, the peak of the financial crisis in 2008 and during the flash crash of 2010.


If we just look at gaps of -1.5% or more that occurred at a three-month (but not one-year) low, then we get the following. The only other time we’ve seen this on back-to-back days or close to it was during the 2010 flash crash.


We can also look at times when there were back-to-back gaps of -1.5% or more, as shown below. Mostly the same time periods.


Shorter-term, this is more equivalent to panic conditions that trigger impulse buying and form shorter-term lows, lasting days to weeks. It is not typically the kind of behavior seen at medium-term lows of several months or more.

Most often after periods of extreme volatility like this, there is a period of testing of the panic lows that goes on for months, and which are more likely to generate the kind of pessimistic sentiment readings that we’re not seeing yet, because most of the selling pressure has been focused at the open.

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