This is an abridged version of our Daily Report.
Not buying it
In the three weeks following the December low, leveraged ETF traders have abandoned long funds while flowing into inverse (short) funds, suggesting they’re betting against the rally. When we look at the largest leveraged index ETFs with at least five years of history, we see that since the December 24 low, the long funds have lost a cumulative $501 million. At the same time, leverage inverse funds have seen a cumulative inflow of $523 million. It seems like ETF traders are showing extreme skepticism about this rally.
This is typical behavior, and the past few weeks have been about average for rallies when these traders were not embracing a rally. It led to better shorter-term returns than when they flowed into long funds and out of inverse ones.
Out of the “big four” indexes, the Nasdaq Composite was the first to climb above its 50-day moving average. This is considered a good sign of returning risk appetite, but it has been better for future returns when the S&P 500 or DJIA were the first to close above their averages, and worse for forward returns when the Nasdaq or Russell 2000 was the leader.
According to the sector ranks later on in this report, Financials are the most-loved sector after Wednesday’s jump. The Optimism Index for the XLF financials fund has soared above 90. According to the Backtest Engine, there have been 47 days when it was above 90 and the fund was below its 200-day average. It added to its gains over the next week 15 times (a 32% win rate).
The post titled ETF Traders Not Buying The Rally; Nasdaq Is First "Big Four" Above Average was originally published as on SentimenTrader.com on 2019-01-17.
At SentimenTrader.com, our service is not focused on market timing per se, but rather risk management.
That may be a distinction without a difference, but it's how we approach the markets. We study signs that suggest it is time to raise or lower market exposure as a function of risk relative to probable reward. It is all about risk-adjusted expectations given existing evidence. Learn more about our service , research, models and indicators.
Follow us on Twitter for up to the minute analysis of market action.