All posts by Michael Comeau
5 Sentiment Indicators You Need to Know About
Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. Most of the time, neither actually gives evidence for their views. That’s why we started T3 Live’s Weekly Sentiment Update. Our Weekly Sentiment Update eliminates opinions, feelings, hunches, and preconceived notions. That lets us strictly focus on the numbers and get a more accurate idea of just how bullish the crowd is. To do this, we take 5 sentiment indicators, break each one down, and then analyze what they mean as a whole. Why 5? Simple — lone sentiment indicators contradict each other all the time. At any given time, one sentiment indicator can read bullish, and another can read bearish. So it’s best to use a variety before forming an opinion. And the 5 we use are all available to the general public without any expensive subscriptions. Here they are, in no particular order: 1) VIX Curve If you understand the basics of the VIX, then you probably know that the VIX alone is useless as a sentiment indicator. And it has little value as a predictor of price. However, by comparing the spot price of the VIX to forward futures prices, you can get an idea of just how much volatility traders are pricing in. For example, if the spot VIX price today is 20 and the 3-month future is 18, that means that traders are pricing in significant short-term volatility. That of course means they’re bearish. Click here for a detailed primer on the VIX Curve 2) CNN Fear & Greed Index The CNN Fear & Greed Index uses a variety of factors including market momentum, junk bond demand, and market volatility to judge whether traders are more fearful (bearish) or greedy (bullish). I’m a big fan of this index because it operates on a simple 0 (extreme fear) to 100 (extreme greed) scale, which eliminates a lot of guesswork. If you’re going to choose only 1 sentiment indicator to follow (which I don’t recommend), this is probably the one to pick because it focuses on actual market activity than polls and surveys. 3) American Association of Individual Investors Sentiment Survey Speaking of surveys, every Thursday, I look forward to the release of the AAII Sentiment Survey. The AAII Sentiment Survey tells us whether individual investors are bullish, bearish, or neutral for the next 6 months. Since individual investors tend to get too bullish at tops and too bearish at bottoms, it’s good to know where they stand. AAII also provides in-depth commentary with its weekly Sentiment Survey data, which is very helpful in making comparisons to historical trends, and in figuring out what’s actually driving public opinion on the market. 4) Chicago Board Options Exchange Equity Put-Call Ratio The CBOE Equity Equity Put-Call Ratio tells us how many put options are traded vs. the number of calls. Reported at the end of each day, the CBOE equity-put call gives us a rough idea of how equity options traders view the market. On average, about 0.65 puts trade for each 1 call every day. When we see major shifts from that long-term average, it can indicate an extreme in sentiment, and a potential trend change in the market. 5) ISE Sentiment Index The ISE Sentiment Index is similar to the CBOE Put-Call ratio, but it has a few interesting twists to it. While many options-derived sentiment indicators are put-call ratios, the ISE Sentiment Index is actually a call-put ratio. The ISE also uses only opening long customer transactions, and eliminates market maker and firm trades. This discards many trades that are not clear bullish or bearish bets from sentiment calculations. For example, shorting puts is actually a bullish trade, and market makers may trade calls and puts strictly to hedge other transactions they make. The ISE also operates on a scale of 100, with 100 representing equal demand for calls and puts. And unlike the CBOE Equity Put-Call, the ISE is reported every 20 minutes on a slight delay. But bizarrely, even tough the ISE Sentiment Index seems better designed, since late December, I’ve found the CBOE Equity Put-Call Ratio more helpful. How You Can You Use Sentiment Indicators in Your Trading Typically, it’s better to buy when sentiment is very bearish, and it’s better to sell when sentiment is very bullish. But you must keep a few things in mind. First, analyzing sentiment is more art than science. Yes, we’re dealing with numbers, but I can tell you from experience that trying to turn them into buy or sell signals through quantitative analysis is extraordinarily difficult. Plus, extremes in sentiment can last quite a long time. For example, as of April 2017, the ISE Sentiment Index has been bearish for months and months. So don’t use sentiment indicators as buy or sell signals on their own. Just treat them as another piece of the puzzle, and incorporate them into your overall market and trend analysis. Let’s take the April 23 French election. After analyzing the 5 sentiment indicators listed above, I determined that traders were very bearish ahead of the news. Traders were clearly pricing in a negative outcome (namely, a victory by far-right populist Marine Le Pen). So if I had wanted to bet on a positive outcome, I would have been encouraged by the bearish sentiment. Why? Because when traders are very negative, positive news can drive huge rallies, which is exactly what we saw on April 24.
Continue Reading -->French Fried Bears: They’re What’s for Dinner!
The market is certainly pleased with the first round of the French Presidential Election. Emmanuel Macron scored a victory and is apparently in the driver’s seat to win the May 7 runoff against far-right populist Marine Le Pen. Le Pen supports a vote for a French exit of the election, and assuming Macron wins, a so-called “Frexit” may be off the table. I wouldn’t count Le Pen completely out just yet though. We’re still living in an era with the Brexit, President Trump, and Italy’s ‘No Vote.’ So anything is possible. Today, the SPX is up 1% and within striking range of the 2401 all-time high. XLF is up 2.4%. The euro is up 1.3% against the dollar. The French CAC 40 index is up 3.9%. And the VIX is down a whopping -23%. So why is this happening? Why are we making such a big move? It’s simple: the bears built a big, big fire. And then they fell in it. Last Thursday afternoon, I pointed out that trader sentiment was looking very bearish heading into the weekend election. As you probably now, the permabears have been out in force saying that everyone’s complacent. But the numbers showed otherwise. For example, the American Association of Individual Investors showed that just 25.7% of individual investors are bullish. That’s well below the long-term average of 38.5%. And as of Friday’s close, the 10-day moving average of the CBOE Equity Put-Call Ratio was 0.703, indicating that traders had been stocking up on puts ahead of the weekend. The last time it was that high was February 8, 2017, when SPX closed at 2294.67. The index then hit 2400.98 on March 1. And then, there’s the ISE Sentiment Index, which measures call options demand relative to put option demand using only opening long customer transactions. (market maker and firm trades are excluded) Its daily average has been just 84 this year, or 84 calls bought for every 100 puts. That’s well below long-term average readings. So there was certainly no shortage of bears heading into the weekend. (h/t to Marc Eckelberry for pointing this stat out on the Virtual Trading Floor® (VTF). And when you get a lot of bears bracing for a negative outcome — like a Le Pen victory — that means there’s ample fuel for a rally if the news is positive, or even neutral. The Lesson to Be Learned High stock prices and valuations do not necessarily equate to bullish sentiment. At its root, a bull market happens when there are consistently more optimists (buyers) than (pessimists) sellers. But even with us within 2% of all-time highs, the data shows that there’s still an awful lot of folks that are braced for downside. It doesn’t seem to make a whole lot of sense… but when is anything involved with the market perfectly logical?
Continue Reading -->Weekly Sentiment Update: The Bears Are Still Raging!
Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. But let’s look at the actual numbers to see how the crowd actually feels. Last week, traders were definitely feeling bearish. We had an inverted VIX curve, big put option demand, and significant negativity among individual investors. Now that the S&P 500 is slamming up towards last week’s highs, let’s take a fresh look at the numbers. 1) VIX Spread – Bearish The VIX is dropping, and the 3-month spread is at +1.0. This shows that traders are moderately bearish. Related: read our primers on VIX basics and VIX curves. 2) CNN Fear & Greed Index – Bearish The Fear & Greed Index is at 34, up slightly from 28 last week. F&G operates on a 1-100 scale, and a reading of 34 means traders are moderately bearish. 3) AAII Sentiment – Bearish The latest AAII Sentiment Survey shows that 25.7% of individual investors are bullish, down from 29% last week. This is well below the long-term average of 38.5%. 4) CBOE Equity Put-Call – Neutral The CBOE Equity-Put Call ratio was at 0.70 yesterday with a 3-day moving average is 0.64. This is indicates that traders are basically neutral. I expect this number to shrink by today’s close. 5) ISE Sentiment – Neutral The ISE Sentiment Index is at 92 (92 calls bought for every 100 puts). The 10 day moving average is just 84.4. So the recent trend shows higher put option demand. However, I’ll actually call this neutral because the ISE Sentiment index has been so down for so long, that today’s 92 reading actually counts as pretty neutral activity. Please note: I am strongly considering dumping ISE Sentiment from this weekly update simply because it’s almost always reading bearish no matter what happens in the market. I may replace it with the CBOE Skew Index, which measures how much traders are paying for protection against tail risk. Conclusion Out of 5 sentiment indicators, we have: 0 bullish 3 bearish 2 neutral We’re not seeing much change from last week’s sentiment report. So my market thesis is unchanged too — I think we could be stuck in a range for a while, though I’ll add I see a better chance of a breakout to new all-time highs than a sharp decline. The current action is reminiscent of last summer, when we consistently had mixed-to-bearish sentiment and stock prices that looked stretched. The result was a seemingly endless sideways grind, because bearish sentiment and high valuations are a good recipe of a whole lotta nothing. The bear case remains the same — what goes up must come down. So the question is whether market volatility has been low enough for a long enough time for a trend change to actually occur. When that changes, I don’t know. But the fact that traders are so bearish implies that the snoozefest could go on for quite a while.
Continue Reading -->TETF: A Cosmo Kramer Approach to ETF Investing?
In recent years, investors have been plowing mountains of dough into passive index ETF’s. Why? Because actively-managed mutual funds and hedge funds have 2 major disadvantages: 1) Poor performance 2) Higher expenses So when the ETF Industry Exposure & Financial Services ETF (TETF) launched today, I couldn’t help but take a close look at this new ETF. This new fund follows the Toroso ETF Industry Index, which provides exposure to publicly-traded companies in the ETF industry. My initial thought was that it sounds like Cosmo Kramer’s coffee table book about coffee tables: But Kramer’s book overdelivered on its promise — not only is the book about coffee tables, but the book itself is a coffee table. Meanwhile, TETF is a plain-vanilla bank/brokerage industry ETF using a hot keyword for marketing purposes. Here is a breakdown of the fund holdings from the press release: Tier 1, 50% of the Index’s exposure, is made up of companies with substantial participation in the ETF industry, providing direct financial impact to shareholders, including BlackRock, Charles Schwab, Invesco, State Street, WisdomTree, and more. Tier 2, 25% of the index’s exposure, is made up of companies with substantial participation in the ETF industry, providing indirect financial impact to shareholders, including KCG Holdings, NASDAQ, Intercontinental Exchange, Inc., and more. Tier 3, 15% of the Index’s exposure, is made up of those companies with moderate levels of participation in industry, including Bank of New York Mellon, US Bancorp, FactSet, Ameriprise Financial, and more. Tier 4, approximately 10% of the Index’s exposure, includes companies that are new or participating in a smaller way in the ETF industry relative to their overall focus, and includes such names as Morningstar, Eaton Vance, Goldman Sachs, Legg Mason, Citigroup, and more. The problem is there are very few pure ETF companies, aside from WisdomTree (WETF). According to BlackRock’s (BLK) most recent quarterly earnings report, just 37% of its assets are ETF’s. And many of these companies, like State Street (STT) and Invesco (IVZ) have plenty of exposure to actively managed mutual funds — the very market the ETF business is supposed to be killing. So I can’t see a reason to consider TETF over something like XLF. XLF has a much lower expense ratio (0.14% vs. 0.64% for TETF), plus it’s more liquid, it’s optionable, and it has a long trading history. And odds are they’re going to have pretty similar performance over the long run anyway. This is why it’s important to take a deep look at trendy ETF’s — odds are there’s already something on the market that does the same job at a lower price with better liquidity. On a related topic, within the next 2 years, expect to see plenty of mediacal marijuana/canabis, virtual reality, and biohacking funds that are ordinary ETF’s covered in the buzzword of the day.
Continue Reading -->Weekly Sentiment Update: Bears Are Everywhere and They’re Killing Volatility!
Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. But let’s look at the actual numbers to see how the crowd actually feels. In last week’s sentiment update, the data indicated that traders had gone bearish even before the US missile attack on Syria and the nonfarmpayrolls miss. Yesterday, we clearly saw even more bears coming out of their caves. So let’s take a complete look at where we stand ahead of the long holiday weekend. 1) VIX Spread – Bearish The VIX is near a 6-month high and the 3-month curve has inverted. Typically, we see this after the market gets wrecked — not when the SPX is less than 3% off all-time highs. This is definitely bearish. 2) CNN Fear & Greed Index – Bearish The Fear & Greed Index is at 28, down from 43 last week. F&G operates on a 1-100 scale, and a reading of 28 means traders are most definitely fearful. 3) AAII Sentiment – Bearish The latest AAII Sentiment Survey shows that 29% of individual investors are bullish, up slightly from last week’s 28.3% reading. This is well below the long-term average of 38.5%. 4) CBOE Equity Put-Call – Bearish The CBOE Equity-Put Call ratio was at 0.69 yesterday with a 3-day moving average is 0.70. This is indicates that traders are bearish. 5) ISE Sentiment – Neutral The ISE Sentiment Index is at 139 (139 calls bought for every 100). The 10 day moving average is just 87. So the recent trend shows higher put option demand. However, I’ll actually call this neutral because the ISE Sentiment index has been so down for so long, that today’s 139 reading counts as pretty bullish activity. Please note: I am strongly considering dumping ISE Sentiment from this weekly update simply because it’s almost always reading bearish no matter what happens in the market. I may replace it with the CBOE Skew Index, which measures how much traders are paying for protection against tail risk. Conclusion Out of 5 sentiment indicators, we have: 0 bullish 4 bearish 1 neutral This is reminiscent of last summer, when we consistently had mixed-to-bearish sentiment and stock prices that looked stretched. The result was a seemingly endless sideways grind, because bearish sentiment and high valuations are a good recipe of a whole lotta nothing. The bear case certainty seems the same — what goes up must come down. So the question is whether market volatility has been low enough for a long enough time for a trend change to actually occur. Here a chart of the S&P 500 along with realized volatility from last July. I marked the Snooze Periods so you can see just how long the present on has persisted: As you can see, it’s been trending down since October — that’s a pretty long stretch considering how much news we’ve gotten. When the trend changes, I don’t know. We’ve had catalyst after catalyst and the market’s shrugged it all off. There’s been the Fed, a lot of economic data and news, a heavy flow of political news, and an explosion in geopolitical tensions. But the fact that traders are so bearish implies that the snoozefest could go on for quite a while.
Continue Reading -->Do you Love the Smell of Fear in the Morning?
Napalm, son. Nothing else in the world smells like that. I love the smell of napalm in the morning. -Lieutenant Colonel Bill Kilgore, Apocalypse Now It looks like traders are starting to worry about serious downside. Yesterday, I pointed out that safety assets were showing big gains amid rising geopolitical tensions. Today, the VIX jumped over 16 for the first time since November 10, 2016. And the VIX is stil trading as a massive premium to actual market volatility. And one of my favorite sentiment indicators — the CBOE Equity Put/Call ratio — skyrocketed to 0.79 yesterday. This is well above the YTD average of 0.65. As you can see in the chart below, we’ve seen 4 spikes to similar levels in the past 5 months. And all of those spikes occurred near interim lows in the S&P 500. Traders can rarely use sentiment indicators as buy/sell signals. They tend to only be useful at extremes. For the CBOE Equity Put/Call, a 0.79 is an outlier, but not a major league freakout. Nonetheless, this latest reading implies that traders are rapidly pricing a lot of fear into the market. When I complete my next Weekly Sentiment Update tomorrow, we should see even more bearishness than last week. The big question now becomes: is a lot of fear enough fear to form a bottom?
Continue Reading -->Weekly Sentiment Update: The Bears Were on Patrol, Even Before Syria and the Weak Jobs Report
Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. But let’s look at the actual numbers to see how the crowd actually feels. With the US missile attack on Syria and the NFP report miss, now is the perfect time for a sentiment update. Last week, the bears were out in force as we digested near all-time highs. But with the bulls still holding steady, let’s see if anything’s changed. 1) VIX Spread – Neutral The VIX spiked a bit post-Syria, but interestingly enough, it’s now DOWN on the day — even after the NFP miss. That has the 3-month VIX spread is at +2.16 which indicates that traders are starting to grow skittish. Readings around +2 are neutral. 2) CNN Fear & Greed Index – Bearish The Fear & Greed Index is at 43, up slightly from 34 last week. F&G operates on a 1-100 scale, and a reading of 43 means traders are moderately fearful. 3) AAII Sentiment – Bearish The latest AAII Sentiment Survey shows that 28.3% of individual investors are bullish, down from 30.2% last week. This is well below the long-term average of 38.5%. 4) CBOE Equity Put-Call – Bearish The CBOE Equity-Put Call ratio was at 0.66 yesterday with a 3-day moving average is 0.63. This is indicates that traders are slightly bearish. 5) ISE Sentiment – Neutral The ISE Sentiment Index is at 108 (108 calls bought for every 100). The 10 day moving average is just 90. This indicates that demand for put options continues to outstrip that for calls. However, I’ll actually call this neutral because the ISE Sentiment index has been so down for so long that 90 is actually high relative to recent history. Please note: I am strongly considering dumping ISE Sentiment from this weekly update simply because it’s almost always reading bearish no matter what happens in the market. I may replace it with the CBOE Skew Index, which measures how much traders are paying for protection against tail risk. Conclusion Out of 5 sentiment indicators, we have: 0 bullish 3 bearish 2 neutral This shows even more bearishness than last week. Note that the all of these indicators except for the VIX spread, were released BEFORE the attack on Syria and the nonfarm payrolls miss. So it’s not like the market was necessarily braced for good news, even though traders were optimistic about NFP because of the recent ADP and jobless claims beats. It is indeed possible that the next readings of the 4 others may grow more bearish in the near future. And interestingly enough, the SPX just slipped into the green, thoguh small caps and banks are underperforming. It should be an interesting day, to say the least…
Continue Reading -->Weekly Sentiment Update: The Bears Are Growling, But No One’s Listening
Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. But let’s look at the actual numbers to see how the crowd actually feels. Last week, bears started sneaking out of their caves just in time for Spring. And with the bulls continuing to hold steady in the face of doubt, let’s see if anything’s changed. 1) VIX Spread – Bullish The VIX spiked to 15 early Monday, but it’s back down under 12. That has the 3-month VIX spread is at +2.69 which indicates that traders are moderately bullish. 2) CNN Fear & Greed Index – Bearish The Fear & Greed Index is at 34, up slightly from 30 last week. F&G operates on a 1-100 scale, and a reading of 34 means traders are bearish. 3) AAII Sentiment – Bearish The latest AAII Sentiment Survey shows that 30.2% of individual investors are bullish, down from 35.3% last week. This is well below the long-term average of 38.5%. 4) CBOE Equity Put-Call – Bearish The CBOE Equity-Put Call ratio was at 0.64 yesterday with a 3-day moving average is 0.67. This is indicates that traders are slightly bearish. 5) ISE Sentiment – Bearish The ISE Sentiment Index is at 83 (83 calls bought for every 100). The 10 day moving average is just 90. This indicates that demand for put options continues to outstrip that for calls. However, I am strongly considering dumping ISE Sentiment from this weekly update simply because it’s almost always reading bearish no matter what happens in the market. I may replace it with the CBOE Skew Index, which measures how much traders are paying for protection against tail risk. Conclusion Out of 5 sentiment indicators, we have: 1 bullish 4 bearish 0 neutral This shows even more bearishness than last week. So while the bears are pushing an age-old theme — everyone’s complacent — I’m getting the feeling that traders are waiting for another shoe to drop, even though we’ve seen improvement in the action below the surface. Yesterday, the Nasdaq and Russell showed relative strength, and on Tuesday, we saw great upward action in the banks. So while some of the so-called “Trump Trade” has unwound itself, the bears’ growing isn’t adding up to much. But there’s an important question to ask here: how can sentiment be bearish if the SPX is 2% from all-time highs? We’ve seen this over and over throughout the bull market — markets hovering near record highs, but sentiment reading negative. My guess is that there’s inherent distrust in the market, and traders are eager to turn bearish on even small declines. And those that are buying often appear to be doing so reluctantly. It’s more of a “I might as well buy” attitude than “I’m buying because we’re going straight to SPX 3000.” And that’s a big difference from the last two bull markets.
Continue Reading -->Did Tim Cook and Elon Musk Pull a Trump on Trump?
The Business of America Is Business -Calvin Coolidge Donald Trump has made a fortune by selling his name. According to the Washington Post, Trump companies have made at least $59 million in revenue. Here’s one of the Washington Post’s examples: In Indonesia, Trump has licensed his name to two projects — a luxury resort and a golf course — for which he earned between $1 million and $5 million each project, each year. Now Apple (AAPL) CEO Tim Cook and Tesla (TSLA) CEO Elon Musk may be running the same game on Trump — selling their names in the name of business. The Washington Post reported that Trump is about to announce “The White House Office of American Innovation,” which is aimed at bringing fresh business-like thinking to Washington. Supposedly the office is already working with Cook, Musk, and Salesforce (CRM) CEO Mark Benioff. After the failure of the healthcare bill on Friday, Trump needs more credibility. Association with tech leaders like Cook and Musk gives him that. Dropping those names when introducing new legislation would be a huge selling point. And odds are, there will be some payback, especially since Trump seems to love everyone that sits down with him. Remember his January 31 meeting with pharma CEO’s? The talk about price controls seemed to dissipate pretty quickly. So what could Cook and Musk get out of Trump? Well, there’s a lot of chatter that having a big personal connection in the White House could help Apple make even more headway in the education market. But I think the real story is the potential repatriation of overseas cash. Apple’s sitting on $246 billion in cash, but $230 billion of it is sitting overseas doing nothing. Cook has said that he’s optimistic about some kind of tax reform including repatration this year, and buddying up with Trump can only help that process. As for Musk, I imagine that Trump could keep government subsidies flowing for electric cars. There’s also potential for some of Tesla’s non-car initiatives, like its energy story solutions, to make their way into Trump’s infrastructure package. And then there’s Solar City (SCTY), Musk’s solar panel company. I can’t imagine that company would hurt by ties to Trump. So Cook and Musk may have struck great deals. They’re selling their names to help Trump build credibility for business-related legislation. And their companies will probably collect big-time cash on the back end.
Continue Reading -->Weekly Sentiment Update: The Bears Are Done Hibernating… and They’re Hungry
Permbulls always say everyone’s bearish. And permabears always say everyone’s bullish. But let’s look at the actual numbers to see how the crowd actually feels. Last week, sentiment went neutral for the second straight week. The big news this week is today’s healthcare vote (well, let’s hope we get it over with it), so let’s see if traders 1) VIX Spread – Bullish The 3-month VIX spread is at +2.6 which indicates that traders are moderately bullish. However, this number has been sliding steadily as traders slowly price in more volatility. 2) CNN Fear & Greed Index – Bearish The Fear & Greed Index is at 30, down from 53 last week. F&G operates on a 1-100 scale, and a reading of 30 means traders are bearish. 3) AAII Sentiment – Bearish The latest AAII Sentiment Survey shows that 35.3% of individual investors are bullish, which is just below the long-term average of 38.5%. It’s close enough to the middle to cal 4) CBOE Equity Put-Call – Bearish The CBOE Equity-Put Call ratio was at 0.67 yesterday with a 3-day moving average is 0.73. This is indicates that traders are bearish. 5) ISE Sentiment – Neutral The ISE Sentiment Index is at 101 (101 calls bought for every 100). So there are a ton of post-Fed call buyers. , which is a bullish reading. The 10 day moving average is just 89.7, up from 83 last week.This indicates strong demand for put options, but the ISE has been extraordinarly low forever, and 89.7 is pretty high compared to recent readings. Conclusion Out of 5 sentiment indicators, we have: 1 bullish 3 bearish 1 neutral So in the past 4 weeks we’ve gone from 2 weeks of bullishness to 2 weeks of neutrality. Markets have been in a slow motion grind lower since the spike high on Trump’s speech, and the sluggishness is impacting traders’ moods.
Continue Reading -->