sentimenTrader Blog

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.



2016-03-04 | Jason Goepfert | Comments

Stock futures are indicated to gap open at least 0.5% as the Nonfarm Payroll (NFP) number exceeded estimates, and for the moment, traders are taking that as a good sign. It could change dramatically before the actual open.

We’ve often discussed in the past how extreme reactions to the NFP number coincide with short-term extremes in stocks, especially when stocks have been at or near a price extreme. A gap of 0.5% or so isn’t exactly “extreme” but it’s coming on the heels of excellent gains over the past few weeks.

When the S&P 500 fund, SPY, gapped up at least 0.5% on NFP day after already having rallied at least 5% in the prior three weeks, it tended to lead to weakness over the next 3-5 days (buying the open of NFP day):


From Friday’s open through the close on Wednesday, 9 out of 10 trades were losers, averaging -1.1%. The sole winner was in March 2011 as stocks were coming out of a decline, and it led to even more gains over the next two months. As we’ve been harping on in the Daily Report, a market that doesn’t do what it should in the short-term typically keeps doing it over the following weeks.

A sample size of 10 is awfully small, so if we adjust the parameters to get more precedents, the overall tendency stays the same. If we require only a 3% rally, then over the next 3 days 14 out of 16 traders were losers. A rally of any size led to 58% losing trades. If we look for a gap up of any size when the S&P was below its 200-day average, then 14 out of 19 trades were losers.

The bottom line is that with a plethora of short-term sentiment extremes, a seasonal soft spot after the first few days of March and typical reactions from gap ups on NFP days, the risk/reward into mid-week next week is tilted to the downside.


2016-03-01 | Jason Goepfert | Comments

Basic, long-term trend-following systems have become all the rage. Backtested results show that owning stocks, or almost any other asset class, when they are above a long-term moving average (such as 10 or 12 months), and not owning them when below the average, is superior on a risk-adjusted basis to simply buying and holding those assets.

Unfortunately for adherents, when a simple strategy gains popularity, triggering assets in ETFs dedicated to the strategy, it’s usually bound to stop working like it did in the past.

Another one that has been making the rounds is that when the 10-month moving average of the S&P has fallen below the 20-month, it preceded the worst losses of the last two bear markets, as published by MarketWatch.

We often discuss how various behavioral biases impact sentiment, and recency bias, or fighting the last battle, is among the most nefarious. Most of those managing investments today lived through at least the last bear market, and usually the last two. That’s what has imprinted, and that’s what they measure patterns against. Those time periods are also historical outliers that are unlikely to repeat in a similar fashion in the near future.

But that’s just opinion. Let’s look at the facts. Here is how we would have done if we sold short the S&P 500 when the 10-month average crossed below the 20-month average. Note that this is being generous, because it’s assuming that we were watching the market on the last day of the month and sold when it looked apparent that the averages would cross.

Remember, these are results from selling short, so a positive return means that stocks declined, and a negative return means that stocks rallied.


As bears are eager to point out, it did great in 2008. Selling short would have been a wonderful strategy. That wasn’t so much the case in 2001, as we would have lost nearly 10% when stocks rallied over the next month. Would we have been able to stick with our short position at the time?

This strategy also did well in 1930 and a few times when markets underwent wide swings around the 1970s. That’s assuming we knew when to get out, however. If we had waited until the signal reversed (when the 10-month average crossed above the 20-month average), then we would have taken a loss on our short position 15 out of 22 times, holding the trades for an average of 12 months.

In any time frame, does it make sense for a typical long-oriented investor to worry about this signal? Perhaps over the next 1- to 3-months. Then, the short position showed a gain 12 times and actually sported a positive return (meaning stocks declined). But when it didn’t work and stocks rallied, they rallied hard seven times, which would be tough to stomach if one is sitting in cash waiting for this signal to play out.

2016-02-26 | Jason Goepfert | Comments

The latest Commitments of Traders data showed some interesting changes this week, especially in equities.

Nonreportable (small) traders in S&P 500, Nasdaq 100 and DJIA futures apparently didn’t believe in the rally, as they pushed their net short position to over $8 billion, an all-time record high.


This data has not been perfect in the past, but it is a useful contrary guide. When these traders are pressing so hard in one direction, stocks most often move the other way. Futures trading is a zero-sum game, and the other side of those speculators’ positions are the “smart money” commercial hedgers.

In other markets, those hedgers continued to sell precious metals as gold and silver rallied. As noted last week, their position in silver is particularly extreme and it became more so this week.

At the other end of the spectrum, they increased longs and are holding substantial positions in wheat and cotton.



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.




← previous page · next page →