Are Traders More Bearish Today Than in 2007?
Quick Summary It’s trendy to say that everyone’s bullish. But the evidence shows that many investors don’t trust the market. A lot of investors left the market altogether! ******** Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. That’s how I open T3 Live’s Weekly Sentiment Reports. And it’s very rare that the “permas” back up their opinions with real data. So I do my best to supply you with numbers that can help us figure out how the crowd’s actually feeling. Obviously, traders want to know if this is the year the market tops out. So they’ll look for parallels to 2007, when the market peaked ahead of the financial crisis. I’m obsessed with sentiment data, so we’re going to take a deep dive into the numbers to figure out: How bullish traders were at the 2007 SPX top, and how that compares to the present Major warning signs ahead of the 2007 market peak, and whether we’re seeing them again today Background on 2007 Before the financial crisis hit, the SPX hit a record high of 1576.09 on October 11, 2007. That put the index was up 11% on the year, excluding dividends. Now, people had been debating the health of housing for years. Former Fed chairs Ben Bernanke and Alan Greenspan weren’t worried about a bubble. But Forbes Magazine actually asked the question ‘What If Housing Crashed?’ back in 2001. And in 2005, Berkshire Hathaway’s Warren Buffett and Charles Munger warned about some areas of housing getting bubbly. How Did Traders Feel in 2007? Traders were very complacent at the October 2007 top. The housing bubble was a subject of constant debate by then, but individual investors as a whole weren’t concerned. They thought we could survive the storm. On October 11, 2007, the American Association of Individual Investors survey indicated that 54.6% of investors were bullish — well above the long-term 38.3% average. That was the highest level since January 17, 2007. The 8-week moving average (a good estimate of the trend) was 44.4%. The average year-to-date at that point was 42.4%. Now let’s see how that compares to readings from last week, just ahead of Monday’s new all-time highs in the SPX and Nasdaq. Last week, just 32.3% of investors were bullish, with an 8-week moving average of just 32.5%. Year-to-date in 2017, the average is just 33.6%. So by this measure, individual investors are not nearly as bullish as they were in 2007. Here’s a chart so you can see the difference between 2007 and today: Clearly, individual investors are nowhere near as confident as they were in 2007. What About Options Traders? I then took a look at the CBOE equity put-call ratio. The long-term average of 0.655 hasn’t changed much since October 1, 2006, which is when my data set begins. So this is a very stable indicator to use. Around the October 11, 2017, however, there was a bit of a lull. On October 15, the 10-day moving average fell to just 0.568, a 3-month low. In 2017, we have not had a single 10-day moving average that low. The last such reading was on December 19, 2016. This isn’t as clear-cut a comparison as the AAII example, but it points to less complacency today. The Gallup Poll A recent Gallup poll showed that just 54% of US adults have owned stocks during the 2009-2017 bull market. But from 2001 – 2008, 62% of adults owned stocks. In fact, the only group of Americans that have maintained stock ownership has been those earning over $100,000 per year. Many of the masses have left. Conclusion It’s trendy to say that everyone’s bullish. But the evidence shows that many investors don’t trust the market. In fact, the Gallup data indicates that a lot of folks just got up from the table altogether. This is good news for the bulls. Why? Because tops tend to happen when everyone’s in. This bull may have some more room to run…
Continue Reading -->Weekly Sentiment Report: The Bears Are Out of the Cave
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. On the morning of June 9, traders were looking very, very bullish. The VIX made a new generational low at 9.37 while the SPX, Nasdaq, Russell 2000, and Dow hit record highs. And then Apple (AAPL) and Nvidia (NVDA) fell from the sky, kicking off a deep dive in the Nasdaq. The VIX hit an intraday high of 12.11 — a 29% move off that 9.37 low. With the Nasdaq clearly under pressure and some traders talking about a change in complexion, now’s a great time to see how bullish traders are. (click here for a primer on the 5 sentiment indicators below) 1) VIX Spread – Bullish The VIX has perked up a bit to 10.64 this morning, though that’s still low by historical norms. The 3-month curve is at +3.57, which indicates traders are moderately bullish. Last Friday, it was at +4.93, was definitely in frothy territory. 2) CNN Fear & Greed Index – Neutral The Fear & Greed Index is at 52, down from 56 last week. F&G operates on a 1-100 scale, and a reading of 52 is as neutral as it gets. 3) AAII Sentiment – Neutral The latest AAII Sentiment Survey shows that 32.3% of individual investors are bullish, down from from 35.4% last week. This 32.3% reading is below the 38.5% long-term average, and indicates that individual investors are basically neutral. Throughout this year, individual investors have tended to not trust the market that much, and this number indicates that nothing’s changed. Even last week, with all 4 major indices making new highs, this number was still in neutral territory. 4) CBOE Equity Put-Call – Bearish The CBOE Equity-Put Call ratio was at 0.80 yesterday with a 3-day moving average of 0.70. These numbers are above historical norms and indicates that traders are bearish. That 0.80 reading is the highest level since April 13, when the US dropped a 22,000 pound bomb on ISIS forces in Afghanistan. So needless to say, traders have been buying plenty of downside protection. 5) ISE Sentiment – Bearish The ISE Sentiment Index is at 63 as of the Thursday close (63 calls bought for every 100 puts). The 10 day moving average is 77.6. This indicates that traders are bearish. Conclusion Out of 5 sentiment indicators, we have: 1 bullish (down from 2 last week) 2 neutral (unchanged) 2 bearish (up from 1) This week’s shakeout has been pretty minor. SPX is less than 14 points off its all-time high, and the Nasdaq isn’t doing all that much worse. The Russell 2000 is also hanging in decently enough. That said, traders cleary show more fear than last week. That’s perhaps best exemplified by the jump in the CBOE equity put-call ratio and the ISE Sentiment Index, both of which point to elevated demand for put options. So the second trouble started hitting, traders started bracing for even more downside. I would also assume that plenty of traders started shorting stocks. The rapid buying of downside protection on any hint of trouble has been a major theme since the election, and I suspect it’s having a dampening effect on volatility. It’s easier for the market to fall when sentiment is positive, because few people are ready for trouble. But when everyone’s looking for trouble… it’s hard to find.
Continue Reading -->Trader’s Digest: The 10 Stories We’re Reading Right Now
Wonder what traders are talking about today? We’re here with the top 10 stories we’re sharing with colleagues today, covering topics like:What exactly happened with the Fed todayWhat Morgan Stanley just said about Bitcoin7 things you need to know before you short a stockAnd more! So check out these links right now and get up to speed: 1) Fed raises rates, unveils cuts to bond holdings in sign of confidence (Reuters) The Federal Reserve raised interest rates on Wednesday for the second time in three months, citing continued U.S. economic growth and job market strength, and announced it would begin cutting its holdings of bonds and other securities this year. Read the Story ==> 2) Dutch Speed-Trader Turns to Currencies After Conquering ETFs (Bloomberg) The 110 traders here, along with 30 colleagues in offices elsewhere, traded €640 billion ($719 billion) in ETFs last year and at least that much in futures, commodities, bonds, stocks, and foreign exchange. Read the Story ==> 3) 7 Things You Should Know Before You Short a Stock (T3 Live) The stock market is the greatest wealth creation machine ever created. But every so often, you’re going to be tempted to bet against the market, or a particular stock or ETF. Continued Reading ==> 4) Regulation Is Only Hope For Bitcoin: Morgan Stanley (The Cointelegraph) In a move that’s certain to irk lovers of Bitcoin and other cryptocurrencies, Morgan Stanley came out with a statement on Tuesday calling for greater governmental control and regulation. Continued Reading ==> 5) Gangsters, Grandmothers and Gold: Japan’s New Crime Wave (NY Times) Sometimes the perpetrators are gangsters. Sometimes they are rather less accustomed to the criminal life. In one case, the ringleader of a middle-aged, female crime ring was said to be a 66-year-old woman. Continue Reading ==> 6) Vintage Wall Street: The Paul Tudor Jones Documentary ‘Trader’ (T3 Live) Paul Tudor Jones, founder of Tudor Investment Corporation, is one of the greatest traders of all time. In the 1987 documentary Trader, PBS takes us inside Jones’ world of high-stakes, practically 24/7 trading. Continue Reading ==> 7) Oil drops to 7-month low, roiled by bearish U.S. inventory report (MarketWatch) Oil prices dropped to their lowest settlement in seven months Wednesday, after U.S. government data showed a smaller-than-expected weekly decline in domestic supplies and an increase in gasoline stockpiles and crude production. Continue Reading ==> 8) Virtual Reality’s Missing Element: Other People (MIT Technology Review) Although it looks as if it must feel isolating to strap on a headset that shuts out the world around you, it could be great for socializing. Continue Reading ==> 9) General Motors Just Became the First Car Manufacturer to Mass Produce Autonomous Cars (Futurism) There’s a potential new major player in the autonomous vehicle industry, and its a seasoned player in the automotive market. Veteran car maker General Motors (GM) announced Tuesday that it’s completed 10 self-driving test vehicles of its Chevrolet Bolt electric vehicle (EV). Continue Reading ==> 10) Prove Everyone Wrong (YouTube) The bigger your dream is, the earlier you’ll have to get up. Watch this video and get motivated for success! Watch the Video ==>
Continue Reading -->7 Things You Should Know Before You Short a Stock
“As a very successful investor once said: “The bearish argument always sounds more intelligent.” -Peter Lynch, One up on Wall Street The stock market is the greatest wealth creation machine ever created. But every so often, you’re going to be tempted to bet against the market, or a particular stock or ETF. Maybe you see a technical pattern you don’t like. Maybe you see an economic downturn coming. Or maybe you think you’ve spotted an outright scam. But shorting is not as simple as you think. Shorting requires an intimate understanding of market mechanics, and the harsh reality that stocks sometimes go up for no good reason. So let’s go through 7 things you absolutely need to know before shorting a stock or ETF. 1) Understand What Shorting Really Is Shorting stock isn’t quite as simple as buying it. Shorting requires borrowing shares from another investor. Your brokerage firm facilitates this process for you. Then, you sell those shares in the hope that they’ll fall in price. If it drops, you’ll buy the shares back (which is called ‘covering’ a short), capturing a profit. For example, if you sell Amazon.com (AMZN) at $1000 and buy it back at $950, you’ve earned a profit of $50 per share. 2) You Can’t Short Everything You Want Not every stock is available to be shorted because it can’t be borrowed. Typically, when a stock is widely disliked or is facing a scandal, it will be so heavily shorted that your broker simply won’t be able to locate shares for you to short. Every brokerage platform has some mechanism for indicating that a stock is hard to borrow, or not available to borrow at all. For examples, as of June 12, 2017, shares of the troubled radio company Cumulus Media (CMLS) can’t be borrowed. With the company rumored to be on the brink of collapse, it’s already attracted plenty of shorts. So there are no shares left for new potential shorts to borrow. 3) Know Your Expenses and Margin Requirements If you want to short stocks, you are required to have a margin account. And you must have enough capital in your account to back up your short positions. For example, if you want to short $10,000 worth of stock, you may be required to have $5,000 of cash in your account. Plus, shorting isn’t free. To short a stock, you have to pay your broker a “stock loan fee.” And the more volatile a stock is, and the more difficult the shares are to borrow, the higher that fee is. Check with your broker for exact terms. 4) Realize That the Interesting Bear Argument Always Sounds Better Most investors want the stock market to go up. But many traders are attracted to contrarianism, and the often-sexy arguments of bears. For example, for years many bears have used obscure financial metrics like the Schiller PE (CAPE) Ratio, market cap to GDP ratio, and NYSE Short Interest to imply that the SPX is overvalued. These arguments always sound a lot more clever than the typical bull rationale, which revolves around plain old earnings and economic growth. And yet, the market’s done nothing but gone up: So think twice before buying into doomsday scenarios, no matter how attractive they sound. 5) Don’t Short Momentum Stocks on Valuation Never short a stock simply because it’s trading at 50 times earnings. You know why? Because it might be worth 60 or 70 times earnings a week from now. Momentum stocks have a tendency to go way farther than may seem reasonable, especially if they are reporting strong earnings. We suggest watching Scott Redler’s recent video lesson Facebook (FB) so you can see how a stock with consistently strong earnings can destroy the bears: And look at momenutm favortie Salesforce.com (CRM). It’s regularly been called overvalued throughout this bull market: Now look at this chart: The bears — as smart as they may be — have been wrong. Why? Because traders love to buy momentum stocks with strong earnings. 6) Your Timing Must Be Impeccable If you want to short a hot stock or the market as a whole, you need great timing. Being right doesn’t matter if you’re not right at the wrong time. For example, many experts correctly called the housing bubble and subsequent collapse of the financial system very early. We’re talking 2004 or 2005. But bank stocks didn’t peak until December 2006. And in the last 5 years, how many times have you heard that there’s a bond bubble?: The bond bubble people may be right… but the TLT chart hasn’t really broken yet, has it?: 7) You Are Betting Against Gravity The S&P 500 has returned an average of 11.4% since 1928, according to NYU Professor Aswath Damodaran. And when it’s rising, even the worst stocks can go up. So you are betting against the market’s reverse gravitational pull towards the sky. We’re not saying you can’t make money shorting. Just be careful!
Continue Reading -->Weekly Sentiment Report: With Record Highs All Around, Are the Bulls Out of Control?
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, we definitely saw a bull party starting, with the VIX dropping back towards the 9.56 generational low set from May 9. And after I wrote that, the VIX made an even lower low at 9.37 while the SPX, Nasdaq, Russell, and Dow all hit record highs. The VIX hasn’t been so low since December 1993. While I always love talking sentiment, this latest market pop makes now the perfect time for an update on the market’s mood, especially since we justed passed this week’s big news trifecta — Comey’s testimony, the UK election, and the ECB Meeting. (click here for a primer on the 5 sentiment indicators below) 1) VIX Spread – Bullish Obviously, the VIX is pretty much as low as it gets. The 3-month curve is at +4.93, which means traders are extremely bullish. Readings near 5 are most definitely in froth territory. 2) CNN Fear & Greed Index – Neutral The Fear & Greed Index is at 59, up from 56 last week. F&G operates on a 1-100 scale, and a reading of 59 is neutral. 3) AAII Sentiment – Neutral The latest AAII Sentiment Survey shows that 35.4% of individual investors are bullish, up from 32.9% last week. This 32.9% reading is below the 38.5% long-term average, and indicates that individual investors are basically neutral. The 8-week moving average for bullishness is just 31.7%. At the start of the year, that 8-week moving average was 45.6%. So even though the markets have been going straight up, individual investors have grown less and less trusting. 4) CBOE Equity Put-Call – Bullish The CBOE Equity-Put Call ratio was at 0.55 yesterday with a 3-day moving average of 0.57. These numbers are under historical norms, indicating that traders are heavily leaning towards call options. This indicates high bullishness. 5) ISE Sentiment – Bearish The ISE Sentiment Index is at 77 this morning (77 calls bought for every 100 puts). The 10 day moving average is 83.7. The ISE has been steadily declining for the past couple of weeks — a bit of a surprise given the market’s stability. Conclusion Out of 5 sentiment indicators, we have: 2 bullish 2 neutral 1 bearish These numbers are unchanged from last week. However, we are definitely approaching frothy territory, based upon the huge collapse in the VIX and the drop in the CBOE equity put-call ratio. The doomsday crowd has been consistently saying the crowd is too bullish — even though they never have numbers to back those views up. That said, they’re close to being right. The AAII sentiment number indicates that individual investors haven’t quite bought into the bull case, even though volatility has disappeared as the market keeps grinding up. Next, I want to repeat some data I posted last week: A recent Gallup poll showed that just 54% of US adults have participated in the 2009-2017 bull market. From 2001 – 2008, 62% of adults owned stocks. Before the financial crisis, as many as 65% adults owned stock. That means a huge number of people have missed out on a 267% move in the stock market. On Thursday, Scott Redler talked about the biggest risk of all — the risk of missing out on wealth creation via smart long-term investing. And it’s crazy that even now, with the market more than tripling and going straight up since the election, there are still a lot of folks that don’t believe. Scott set a target of 2470 by June 30, and that scenario looks more and more likely. Now if that AAII sentiment number was at 45%, I’d probably be looking at SPY puts or VIX calls. But for now, it looks like the bulls still have the ball.
Continue Reading -->T3 Live Coming Events | June 2017
Boca Raton, Florida | Saturday June 10 | FREE Stock Trading Seminar RESERVE YOUR SEMINAR SEAT >> Join T3 Live for a special 4 hour training event for stock traders. | 1-888-998-3548 View the Agenda | Register Today == > Veteran trader Joseph Conti is one of the original SOES Bandits. One of the earliest NASDAQ traders capitalizing on the small order execution system and routinely traded millions of shares per day. Joseph also managed over 500 proprietary traders from the mid 1990’s through the mid 2000’s. He has witnessed the highs and lows of trading for more than 2 decades, his stories and insights will surely shorten your learning curve. Former floor trader in Chicago, Rob Smith has dedicated his life to mastering a quantified edge. Sounds fancy, but it means you never make a decision without a good reason. A repeatable reason. Defining your edge is where consistency is borne. Plan to be blown away by Rob’s Quant Edge presentation. Reserve Your Spot == > Here is your Itinerary: Saturday June 10, 2017 9am-1pm RENAISSANCE BOCA RATON HOTEL 2000 NW 19th St, Boca Raton, FL 33431 RESERVE YOUR SEMINAR SEAT >> Traders Digest: The 10 Stories We’re Reading Right NowFrom the Desk of Micheal Comeau… Wonder what traders are talking about today? We’re here with the top 10 stories we’re sharing with colleagues today, covering topics like:Why traders are betting big on the QQQ ETFTuesday’s mega-rally in gold, which could be a sign of things to comeThe mysterious world of bitcoin and other cryptocurrenciesAnd more! So check out these links right now and get up to speed: Get All 10 Posts From this Week’s Trader’s Digest Here == >Omega Prop Training | June 24-June 27 | Info 1-888-998-3548 Redler Ultimate Access | Only 20 Spots | NYC October 2017 LEARN MORE ABOUT TRAINING WITH SCOTT >> Jeff Cooper: Why the Gold Explosion May Boom BIggerThe precious metals miners were the big story on Tuesday. And I think it’s the beginning of a bigger move. The upthrust didn’t take us by surprise since the Daily Market Report has been positioned long in GDXJ, FNV and PAAS for the past week. What was surprising was the persistent trend day that wouldn’t pull back to allow players on. For the last week, I’ve been getting a lot of emails and Tweets asking how I could be bullish on the miners when they were lagging gold itself. My answer was that there may have been some month-end cross currents dragging the miners down. Continue Reading == > Trader Training…Quant Edge 4 – Week Coaching Program with Rob Smith | Begins July 10, 2017 Learn More == > Options Training With Doug Robertson | Listen to the Podcast == > Forex Training with Kurt Capra | How to bounce back from adversity == > New Training from Jeff Cooper | How to Combine Technical Signals for Maximum Profits == > How to Trade the News With Mark Melnick | Download the Case Study == >
Continue Reading -->Trader’s Digest: The 10 Stories We’re Reading Right Now
Wonder what traders are talking about today? We’re here with the top 10 stories we’re sharing with colleagues today, covering topics like:Why traders are betting big on the QQQ ETFTuesday’s mega-rally in gold, which could be a sign of things to comeThe mysterious world of bitcoin and other cryptocurrenciesAnd more! So check out these links right now and get up to speed: 1) ETF Buyers Have a New Go-To Fund for Chasing the Tech Rally (Bloomberg) After a stellar run in tech stocks this year, some ETF investors are cashing in their chips. Others are trying their luck with a new hand. Read the Story ==> 2) Jeff Cooper: Why the Gold Explosion May Boom Bigger (T3 Live) The precious metals miners were the big story on Tuesday. And I think it’s the beginning of a bigger move. Read the Story ==> 3) Santander Rescues Troubled Rival in Test of Europe’s New Rules (NY Times) After the global financial crisis, Europe built a system designed to contain the collateral damage from failing banks. That new system appeared to pass its first test on Wednesday, as authorities efficiently dispatched a troubled Spanish lender. Continued Reading ==> 4) The Quiet Master of Cryptocurrency — Nick Szabo (The Tim Ferris Show) Nick Szabo is a polymath. The breadth and depth of his interests and knowledge are truly astounding. He’s a computer scientist, legal scholar, and cryptographer best known for his pioneering research in digital contracts and cryptocurrency. Continued Reading ==> 5) Tesla gives a shadowy tease of the Model Y crossover SUV (Engadget) It’ll take a few more years before Tesla officially launches the Model Y, but we now kinda, sorta know what it could look like. Continue Reading ==> 6) SEC Takes More Time to Mull Chicago Stock Exchange’s China Deal (NY Times) The U.S. Securities and Exchange Commission will take up to another 60 days to decide whether to allow the sale of the Chicago Stock Exchange to a group of investors led by China-based Chongqing Casin Enterprise Group. Continue Reading ==> 7) Rob Smith: Why Does VXX Always Go Down? If you’re in the market these days, you know that everyone’s talking about the incredibly weak VIX. And while the VIX remains near all-time lows, interest in trading the VIX ETN’s (exchange traded notes) — especially VXX, UVXY, and TVIX — is at an all-time high! Continue Reading ==> 8) Theresa May’s Incredible Shrinking Poll Numbers (The Atlantic) As early as January, the Economist had dubbed her “Theresa Maybe” for her lack of any clear strategy on Brexit and habit for backing off key promises, not least the election itself. But this was more than just a nickname now. Her ineptitude had become the main event. Continue Reading ==> 9) James Comey testifies before Congress: 5 things to watch (CBS News) James Comey is set to testify publicly before Congress for the first time on Thursday since President Trump fired him as FBI director last month. Comey’s appearance has been highly anticipated as countless bombshells involving the lead-up to and aftermath of his termination have leaked in the news media over the last month. Continue Reading ==> 10) Retailers might turn parking lot dead space into biz opportunity (NY Post) Faced with shrinking sales, mall operators, big box stores — like Target, Lowe’s, Home Depot, Macy’s and JCPenney — and other anchor tenants have started to reimagine their acres of unused parking lots as redevelopment opportunities that could create new revenue streams, The Post has learned. Continue Reading ==>
Continue Reading -->5 Fast Facts About the Boring S&P 500
2017’s been a nutty year. It’s been a remarkably sleepy year, with the S&P 500 grinding up at a snail’s pace despite growing geopolitical tensions, stretched valuations, and an endless flurry of headlines out of Washington courtsey of President Trump. So I dumped 9,438 trading days worth of data — going back to January 3, 1980 — to give you a numbers-based breakdown of just how weird 2017 is. 1) 1% Days The S&P 500 has moved 1% or more in a day only 4 times in 2017. In 2016, we had 4 daily 1% moves by January 8! And before 2017, the market had 1% daily moves on average 63 times a year! 2) Up Days and Down Days In 2017, 54.7% of all trading days have been up days. While it’s felt like the market only goes up a little bit every day, this is only slightly above the pre-2017 average of 53.1%. 3) Intraday Volatility I calculate a day’s trading range with the following formula: High minus low, divided by the prior day’s close. So if the S&P had a 20-point difference between its high and low, and the prior day’s close was 2000, the range would be 1%. The average daily range in 2017 has been 0.6%. This is less than half the pre-2017 average of 1.3%. That means intraday movement is running at less than half the long-term average. 4) Average Daily Move On average, the S&P has moved only 0.3% per day in 2016. This is dramatically lower than the pre-2017 average of 0.8%. So if you’re falling asleep watching the major averages, you’re not alone. I write about the major averages every day, and my daily mission is now “find an interesting way to say nothing happened!” 5) Finishes Near the Highs of the Day For my final piece of analysis, I wanted to see if the S&P 500 has tended to finish closer to the highs of the day. So I looked for days where the S&P 500 finished in the top 1/3 of the daily range. (the high minus the low). We have had 106 trading days through Monday, and the S&P 500 finished in the top 1/3 of the range 54 times. That’s 51%. Pre-2017, the S&P finished in the top third of its range just 42% of the time. ******** The takeaways are simple: 1) The S&P 500 is not moving intraday 2) The S&P 500 is not moving day-to-day 3) Judging by the trend for us to finish near the highs, it doesn’t seem to pay to short the market intraday. 4) If you’re looking for action, focus on hot momentum stocks… not the indices and related ETF’s!
Continue Reading -->The Sub-10 VIX Is About to Set a Crazy Record
Min Zeng of the Wall Street Journal just Tweeted a very interesting stat about the VIX: $VIX at 9.75, on pace to close under 10 for the seventh time this year–the most ever. I double-checked the data and indeed, Zeng is correct. But taking a deeper look at the data (my data set goes back to 1990), things get even more bizarre. All 6 of 2017’s sub-10 closes in the VIX happened on May 8 or later. (remember, today’s would make lucky number 7) And if get another sub-10 close, that would mark 5 in the past 7 sessions. Since 1990, the VIX has NEVER closed below 10 in 5 out of 7 sessions. So it’s on the verge of a truly incredible record. Already, the VIX has finished under 10 in 4 of the last 6 sessions. This has only happened 3 other times since 1990. Those 3 other occurences were on 12/28, 12/29, and 12/30 in 1993, during a streak when the VIX had 4 straight closes below 10. So the post-election collapse in volatility truly is remarkable. Now let’s take things a step further. Prior to May 8, 2017, there were only 9 sub-10 closes in the VIX. That’s right. Just 9 out of 6,891 trading days — or 0.13% of the time. And now we’re going on 5 in just 7 days — or 71%! This looks insane, but let me explain why it’s perfectly logical. The VIX represents expected volatility. And when actual market volatility goes to near-zero — as it has since President Trump’s victory — the VIX follows. Therefore, the VIX’ behavior is entirely logical. Anecdotally, I’ve been hearing a lot of traders chat up long positions in VIX-related instruments like VIX calls or VXX calls, or plain old SPY/SPX options. I’ll just leave you with one of the great all-time market one-liners: “The market can stay irrational longer than you can stay solvent.” -John Maynard Keynes 2017 has been BRUTAL to traders betting on a rebound in volatility. You can know why it should happen, but you had better know when, or else you’ll be eaten alive by time decay, one penny at a time. So if you’re going to put your chips down… be very careful.
Continue Reading -->Weekly Sentiment Update: The F.O.M.O. Train Is Unstoppable… for Now
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, we saw traders show less more fear after the SPX broke to new all-time highs. And the question I asked was whether we were set for a F.O.M.O.-driven ride up to SPX 2500. With markets still clawing higher, it looks like the answer is yes. So let’s take a fresh look at our 5 primary sentiment indicators to see if the ride towards 2500 has made the bulls overconfident. (click here for a primer on them) 1) VIX Spread – Bullish The VIX dropped as low as 9.65 Friday, putting it within range of the the 9.56 generational low on May 9. A couple of weeks ago, the VIX curve nearly inverted, but the 3-month curve is at +3.7, indicating traders are not pricing in much near-term volatility. Or in plain English, folks are bullish. 2) CNN Fear & Greed Index – Neutral The Fear & Greed Index is at 59, up from 56 last week. F&G operates on a 1-100 scale, and a reading of 59 is pretty much neutral. 3) AAII Sentiment – Bearish The latest AAII Sentiment Survey shows that 26.9% of individual investors are bullish. This 26.9% reading is well below the 38.5% long-term average, and implies that individual investors do not trust this bull move. 4) CBOE Equity Put-Call – Bullish The CBOE Equity-Put Call ratio was at 0.66 yesterday with a 3-day moving average of 0.66. This is above historical averages. 5) ISE Sentiment – Neutral The ISE Sentiment Index was at 84 Friday afternoon (84 calls bought for every 100 puts). The 10 day moving average is 89.3. These numbers show higher put demand, but they’re actually in-line with recent averages, so I’ll also lump it in as neutral again. Conclusion Out of 5 sentiment indicators, we have: 2 bullish 2 neutral 1 bearish So these numbers are unchanged from last week. The question to ask is whether we’re on the verge of outright forth. Last week, I said no. This week… I’m saying maybe. The AAII Sentiment Survey indicates that individual investors are pretty skittish. Typically, at tops, you see the masses wanting to get in. One possibility is that the tense geopolitical climate is preventing investors from getting too bullish, even though volatility has gone to basically nothing since the election. And the CBOE equity-put call doesn’t show rampant demand for call options, another thing we typically see at market tops. Therefore, I think there’s a reasonable chance we charge past SPX 2500 in the next couple of weeks as shorts throw the towel in, unable to withstand the bulls’ painfully slow push higher. And at that point, perhaps crossing a major round number like 2500 really gets the bulls overconfident, setting the stage for a drop. But for now, let the relentless post-election bid teach you an important lesson: the trend is your friend. And it can be your friend for a lot longer than may seem reasonable. So if you want to bet against it, have a really good reason. I’ll end with a tip: if you’re reason is “what goes up must come down,” go back to the drawing board!
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