Short-term Outlook:  Neutral  As of Dec 17, 1098 SPX

Equity Indicators - Updates and Extremes

Inverse ETF Volume as % Of Total Volume

Yesterday we took a look at the explosion in speculative option volume, which exhibited the biggest skew towards buying call options (and not buying put options) since the bubble days in 2000.

At least one possible explanation is that unlike 2000, nowadays investors have the option of using exchange-traded funds that perform inversely to the market.  So folks can sell short the market via something like the Proshares Short S&P 500 fund and bet on a market decline instead of actually selling short stock or futures or buying put options.

The chart below shows total volume in the major inverse ETFs since the bear market began in 2007.  Also shown is a ratio of inverse ETF volume to total NYSE composite volume.

Inverse volume took a huge hit last month.  While that's obviously true due to the holidays, it wasn't the only factor.  As a ratio to total composite volume, we saw these bets against the market fall to their lowest level since early 2007, before these funds really caught the attention of most investors.

While inverse ETF volume has picked up a little bit to start the new year, it's just a blip.  On both an absolute and relative basis, the focus on these funds remains near the lowest levels we've seen over the past 2+ years.

That certainly casts serious doubt on the idea that traders may be betting against the market via means other than put options.

Off-Earnings Season As A Predictor

I've seen a few references in the media over the past couple of days suggesting that the recent surge in stocks was either: 1) a sign that investors had become too optimistic about earnings, and so we're due for a fall, or 2) a sign that the recovery is taking hold and evidence that stocks will continue to do well during earnings.

Those conflicting arguments are purely guesswork.  In the past, we've looked at this in terms of market performance heading into earnings and how stocks then fared during earnings season (and vice versa), to see if there's anything to the idea that one leads the other.

As a refresher, a chart from last October is below.

We're actually in almost the same situation with how the S&P performed during the off-season as we were last October.  According to the past 12 years, off-season performance hasn't been a major predictor of how stocks would do once earnings began rolling out, but if anything there was a slight negative correlation.

Since 1950, big off-season gains led to a positive earnings season 55% of the time, averaging 0.0%, and an essentially even average maximum loss versus average maximum gain (-3.7% versus +3.1%).