Sentiment Report - February 3, 2012

Posted 02/03/12 7:30 PM ET by Jason Goepfert                Archive





Smart / Dumb Money Confidence     


1  An index that looks at various methods of hedging shows that there is very little of it going on.  The Equity Hedging Index has dropped to one of the lowest levels in a decade.


2  Commercial hedgers in stock index futures have gone net short several major indexes to nearly the largest degree in nine years.


3  A surge in buying pressure today took the short-term Intraday Cumulative TICK for the Nasdaq to its 2nd-highest reading in 5 years.  The highest was +11800 on 10/27/11 (the Nasdaq corrected over the next few weeks).


4  This week's Commitments of Traders report was a bit unusual in that some of the larger changes were in the stock index futures (see below).  Elsewhere, traders relaxed their long bets on the US Dollar in favor of the Aussie Dollar, and moved to a new all-time record net long position in Unleaded Gasoline.


The Smart Money is 38% confident in a rally.

The Dumb Money is 67% confident in a rally.


Smart/Dumb Confidence

 (click chart for larger version)


Quick Links

Risk Summary  |  Today's Updates  Equity Indicators

Stocks and Sectors  |  Commodities  |  Comments 


Risk Summary


Short-term Risk Level:  7     




Intermediate-term Risk Level:  7     




Bottom Line

The risk of a meaningful (3%-8%) correction has been high for the past few weeks, but it's simply been wrong to bet on it.  It looked like a better bet when the S&P closed - barely - below 1315 for two days in a row, but again that was wrong as it jumped right back above and is now challenging its 2011 highs.  Performance after gaps up to new highs on Payroll Report days is very poor during the next 2-3 days, so again we see risk of a pullback as being high...with the caveat that such an outlook has been outright wrong for 3 weeks.


Bottom Line

The market is torn between good momentum and bad seasonality and indicator values (see the "Active Studies" and "Indicators At Extremes" sections below).  Momentum has ruled, with a historic run during January.  The S&P had closed below potential support at 1315 for two days in a row, then popped back above, so again it's too early to expect an imminent correction until we drop back below or go on to greater sentiment extremes.

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Today's Studies & Updates



Equity Hedging Activity Drops

Several times over the years, we've looked at an indicator that we call the Equity Hedging Index (EHI).


As a reminder, the Index takes into account various ways that most speculators would hedge against a market decline:


1.  Raise cash

2.  Buy put options

3.  Trade an inverse ETF or mutual fund

4.  Sell short futures contracts

5.  Buy credit default swaps


The Index looks at each of the measures above and compares current levels to historical averages.  The more they show hedging behavior, the higher the EHI would go, and vice-versa.


For the latest week, the EHI has dropped down to 19, one of the lowest readings we've recorded in the past decade.  The others are highlighted with the red arrows.


Click chart for larger view


This is a preliminary reading for this week - we don't yet know how many puts were bought to open this week.  If small and large options traders reduced their put buying to where it was at the end of December, then this week's EHI will drop to 10, just above the lowest reading on record.


That reading was back in mid-December 2010, which was a market quite similar to what we're seeing now.  While it was a much more seasonally positive time of year, many sentiment indicators had gone to extremes, and yet stocks continued to creep higher day after day...until the correction ultimately hit and wiped out those gains.


  continued from previous column


Futures Traders Continue To Increase Hedges

Part of the Equity Hedging Index is hedging activity among traders.


Last week, we took a look at large commercial hedgers in the major equity index futures contracts (excluding the S&P 500).  These are very large traders who use the futures market to hedge their day-to-day business operations.


The latest report shows that they've hedged even further, and are now net short approximately $2.7 billion worth of futures.  That is very nearly equal to the largest short positions of the last nine years.


Click chart for larger view



 continued in next column   


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Active Studies & Updates

See expired studies


Bearish for equities 


Bullish for equities 

Date Description Priority   Date Description Priority
01/31 Extremely low inverse ETF volume Medium   01/04 Upside momentum High
01/25 Rydex traders exit cash, enter leverage Medium   12/23 Multiple follow-through days Medium
01/25 Odd Lot buyers pull back Low   12/09 4th quarter gain of +10% Medium
01/19 Liquidity Premiums hit an extreme Medium   11/11 3 months of large unfilled gaps Medium
01/18 Nasdaq performance after Intel earnings High   11/10 Very low penny stock volume Medium
01/17 Congress in session with low ratings Medium   10/04 Rydex traders flee to cash High
01/13 Performance after MLK day Medium        
01/10 CSFB vs. VIX divergence Medium        
01/10 OEX vs. equity options Medium        
01/09 Spike in Nasdaq / NYSE Volume Low        
01/06 Low VIX ahead of earnings Medium        
11/03 Rydex traders getting "toppy" Medium        
09/02 Low ratio of cash to equities Low        


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General Equity Market Indicators

See all equity indicators


Most of our indicator groups are showing more bearish (for the market) than bullish individual indicators.  We don't have a large number of bearish extremes, but as of January 17th we have 0% at a bullish (for the market) extreme.  That's unusual, and often precedes a market pullback...but it would be more of a probability if we had more than 30% of our indicators at a bearish extreme at the same time.



More history:    Short-term Score      Long-term Score     Indicators At Extremes


Indicators At Extremes

* New extreme

Bearish for equities 

Bullish for equities 


Price Oscillator - S&P

Intraday Cumulative Tick - NASDAQ

Up Volume Ratio - NYSE

Up Volume Ratio - NASDAQ

Down Pressure - S&P

Daily Cumulative Tick - NASDAQ

Fidelity Sector Breath

Put/Call Ratio - Equity Options Only

Rydex % of Sectors with Assets > 50 Day Avg

Down Pressure - NDX

Rydex Bull Fund Asset Flow

Put/Call Ratio - Total of All Options


Composite Model

Put/Call Ratio - Equity De-Trended

Put/Call Ratio - Equity Moving Averages

Put/Call Ratio - Total of Moving Averages

Liquidity Premiun - SPY

NH/NL Ratio - NYSE

Up Issues Ratio - NYSE

Up Issues Ratio - NASDAQ

VIX Transform

Sentiment Survey - AAII

STEM Model

Short-term Indicator Score

Intermediate-term Indicator Score

Smart Money Confidence

Dumb Money Confidence

Indicators At Extremes

AIM Model

Put/Call Ratio - OEX Options Only



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Stock And Sector Sentiment

Go to sector breadth charts


Most of the broad sectors are showing at least neutral sentiment, with a few well into overbought territory, especially a couple of previously beaten-down ones like Financials and Housing.  We typically see a pullback after those sectors reach these levels.



See this Data Brief for more background on the Sentiment Scores


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Currency / Commodity Sentiment

See all currency/commodity indicators


Traders just aren't tiring of selling the Euro, with short positions hit record highs week after week.  The Pound is nearing similarly pessimistic territory, as traders head to the US Dollar.  Despite a relentless slide to multi-year lows, sentiment towards Natural Gas has been fairly tame.  It's showing pessimism, for sure, but not the deep levels we'd expect to see after such an extended decline.




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