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Daily Report : Another gap preps SPY for record momentum

Jason Goepfert
2020-08-28
The S&P 500 fund, SPY, gapped up for the 5th straight day, hitting record highs. This is just shy of the greatest opening momentum in the fund's history. The others saw subdued forward returns.
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Another gap preps SPY for record momentum: The S&P 500 fund, SPY, gapped up for the 5th straight day, hitting record highs. This is just shy of the greatest opening momentum in the fund's history. The others saw subdued forward returns.

The latest Commitments of Traders report was released, covering positions through Tuesday: The 3-Year Min/Max Screen shows that "smart money" hedgers mostly continued their same themes, selling the euro and holding long stocks. They became more aggressive in selling commodities including sugar and coffee. Their total short position in the contracts making up the DBA exchange-traded fund reached more than 70,000 contracts. The Backtest Engine shows that over the past 9 years, a short position this large preceded losses in DBA in the months ahead every time (in 2011, DBA managed to gain for months before giving back its gains). If these contracts can continue to gain, it will suggest a major trend change.

Bottom Line:

  • Weight of the evidence has been suggesting flat/lower stock prices short- to medium-term again; still suggesting higher prices long-term
  • Indicators show high optimism, with Dumb Money Confidence above 80% with signs of reckless speculation during what appears to be an unhealthy market environment, historically a bad combination, though it's easing somewhat and so far the dangerous / odd conditions have not mattered to the major indexes
  • Active Studies show a heavy positive skew over the medium- to long-term; breadth thrusts, recoveries, and trend changes have an almost unblemished record at preceding higher prices over a 6-12 month time frame
  • Signs of extremely skewed preference for tech stocks neared exhaustion by late June, especially relative to industrials and financials (here and here)
  • Indicators and studies for other markets are showing less consistent forward results, though it's not a great sign for Treasuries that hedgers are net short and optimism on metals recently became extreme with concerning 100-day analogs, with "perfect" breadth among miners recently dipping a bit.

Smart / Dumb Money Confidence

Smart Money Confidence: 35% Dumb Money Confidence: 82%

Risk Levels

Stocks Short-Term

Stocks Medium-Term

Bonds

Crude Oil

Gold

Agriculture

Active Studies

Click here to view the Active Research the site.
Time FrameBullishBearish
Short-Term01
Medium-Term18
Long-Term471

Indicators at Extremes

Click here to view on the site (% Extremes and "Excess" tabs on the dashboard).
% Showing Pessimism: 6%
Bullish for Stocks

Inverse ETF Volume
VIX
OEX Put/Call Ratio
Mutual Fund Flow (no ETFs)
Major Index Combo
% Showing Optimism: 49%
Bearish for Stocks

Smart Money / Dumb Money Confidence Spread
Intermediate Term Optimism Index (Optix)
Smart Money Confidence
Short-term Optimism Index (Optix)
Dumb Money Confidence
% Showing Excess Optimism
AIM (Advisor and Investor Model)
NYSE High/Low Ratio
SPY Liquidity Premium
Rydex Ratio
Rydex Money Market %
Fidelity Funds Breadth
OEX Determination Index
Equity Put/Call Ratio De-Trended
VIX Term Structure
Stock/Bond Ratio
ISE Equity Call/Put Ratio
Equity Put/Call Ratio
OEX Open Interest Ratio
Total Put/Call Ratio
NAAIM Exposure Index
SKEW Index
ROBO Put/Call Ratio
Options Speculation Index
Retail Money Market Ratio
NYSE Available Cash
Equity / Money Market Asset Ratio
Mutual Fund Cash Level

Portfolio

PositionWeight %Added / ReducedDate
Stocks29.8Reduced 9.1%2020-06-11
Bonds0.0Reduced 6.7%2020-02-28
Commodities5.2Added 2.4%
2020-02-28
Precious Metals0.0Reduced 3.6%2020-02-28
Special Situations0.0Reduced 31.9%2020-03-17
Cash65.0
Updates (Changes made today are underlined)

After stocks bottomed on March 23rd, they enjoyed a historic buying thrust and retraced a larger amount of the decline than "just a bear market rally" tends to. Through June, there were signs of breadth thrusts, recoveries, and trend changes that have an almost unblemished record at preceding higher prices over a 6-12 month time frame.

On a shorter-term basis, our indicators have been showing high optimism, with Dumb Money Confidence recently above 80%, along with signs of reckless speculation during what appears to be an unhealthy market environment, historically a bad combination. While there are certainly some outlier indicators that are showing apathy or even outright pessimism, a weight-of-the-evidence approach suggests high risk over a multi-week to multi-month time frame.

I've been carrying a low (too low) level of exposure to stocks, as well as bonds and gold. I don't see a good opportunity to add to any of those currently, with poor prospects pretty much all the way around. As worried as I am over the medium-term, I would only grudgingly reduce my exposure even further given the longer-term positives we spent so much time discussing in the spring. At this point, I would only look seriously at lowering exposure further if the S&P 500 starts to show some sign of faltering, which so far has been almost completely absent.


RETURN YTD: -1.2%

2019: 12.6%, 2018: 0.6%, 2017: 3.8%, 2016: 17.1%, 2015: 9.2%, 2014: 14.5%, 2013: 2.2%, 2012: 10.8%, 2011: 16.5%, 2010: 15.3%, 2009: 23.9%, 2008: 16.2%, 2007: 7.8%

Phase Table

Click here to view the Phase Table on the site.

Ranks

Click here to view on the site (Ranks tab on the Dashboard).

Sentiment Around The World

Click here to view on the site.

Optimism Index Thumbnails

Sector ETF's - 10-Day Moving Average
Country ETF's - 10-Day Moving Average
Bond ETF's - 10-Day Moving Average
Currency ETF's - 5-Day Moving Average
Commodity ETF's - 5-Day Moving Average

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