Sentiment Report - February 17, 2012

Posted 02/17/12 7:00 PM ET by Jason Goepfert                Archive





Smart / Dumb Money Confidence     


1  Price patterns like Friday's (small range, gap open, close below the open, at a 52-week high) tend to precede pullbacks about 60% of the time, but as we've seen several times in the past month, the market can roll right over these biases.


2  The options market is pricing in a high probability of a black swan type of event during the next 1-3 months.  According to one indicator, that risk is at a record high.


3  There wasn't much of a change in this week's Commitments of Traders report.  There's still a large speculative long position in equities, and the energy complex is getting more attention too, especially Unleaded Gas.



The Smart Money is 33% confident in a rally.

The Dumb Money is 67% confident in a rally.


Smart/Dumb Confidence

 (click chart for larger version)


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Risk Summary  |  Today's Updates  Equity Indicators

Stocks and Sectors  |  Commodities  |  Comments 


Risk Summary


Short-term Risk Level:  6     




Intermediate-term Risk Level:  8     




Bottom Line

No change in outlook...there is simply no desire on the part of sellers to push their luck, so momentum has held strong.  We've seen an increasing number of disturbing signals, including Wednesday's reversal in the market's premier stock.  As has been the case, though, we're not considering a correction to most likely be imminent unless the S&P 500 cash index manages to close below 1342ish.


Bottom Line

Stocks have been driven by impressive momentum, and recently we've discussed that such streaks usually bode well long-term.  More immediately, though, disturbing extremes in sentiment and a major reversal in the market's premier stock, Apple, bode ill.  Risk is high for a looming correction, most likely 2-4 weeks and 3%-8% in duration.

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Today's Studies & Updates



Black Swan Risk Intensifies


Earlier this week, we looked at the CS Fear Barometer.  This alternate gauge of options traders' uncertainty shows that S&P 500 traders are bidding up the value of put options.


While that sounds like it should be a contrary indicator, it's not.  This has proven to be the "smart money".  When the CSFB hits a high while the "common man" VIX is pricing in low volatility, stocks usually tumble afterward.


Disturbingly, the VIX has crumbled 15% in the past two days, while the CSFB just hit a new all-time high.  In other words, traders are paying a record high amount for 3-month protection.


Also concerning is another black swan-type of indicator, the SKEW index from the Chicago Board Options Exchange.


From the CBOE:

The CBOE Skew Index is an option-based indicator that measures the perceived tail risk of the distribution of S&P 500 returns at a 30-day horizon. Tail risk is the risk associated with an increase in the probability of outlier returns - returns two or more standard deviations below the mean.

At a normal skew level of 100, the probability of a black swam event during the next 30 days is 2.3%.


But the latest value of the SKEW is 130.  At that level, the probability of a black swan event is 10.4%.


My math may be a bit off here, but the VIX is suggesting that the S&P 500 shouldn't move more than about 5% over the next 30 days.


But the SKEW index suggests that there is more than a 10% probability that the move will be greater than 10%.


It's certainly not a perfect predictor - it jumped above 130 many times in 2005 and 2006, with nothing more nefarious than a flattening out of the uptrend in the S&P 500 as a result.  But the current high level, combined with a new record high in the CSFB and relatively low level of the VIX, suggests caution.




Click chart for larger view



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Active Studies & Updates

See expired studies


Bearish for equities 


Bullish for equities 

Date Description Priority   Date Description Priority
02/06 Surge in junk debt issuance Medium   01/04 Upside momentum High
02/03 Equity Hedging Index gets extreme Medium   12/23 Multiple follow-through days Medium
01/31 Extremely low inverse ETF volume Medium   12/09 4th quarter gain of +10% Medium
01/25 Rydex traders exit cash, enter leverage Medium   11/11 3 months of large unfilled gaps Medium
01/25 Odd Lot buyers pull back Low   11/10 Very low penny stock volume Medium
01/19 Liquidity Premiums hit an extreme Medium   10/04 Rydex traders flee to cash High
01/18 Nasdaq performance after Intel earnings High        
01/17 Congress in session with low ratings Medium        
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        
09/02 Low ratio of cash to equities Low        


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General Equity Market Indicators

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With very few of our indicators at a bullish (for the market) extreme, even none of them at some points, when we see the percentage of bearish indicators go over 30% of the total, it tends to precede market pullbacks.  That happened on January 20th and again February 3rd, but so far stocks have reacted much.  A couple of times in 2010, we saw the bearish indicators jump above 40% before a correction set in, so that's a possibility here, but we would still consider risk to be fairly high.



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


Indicators At Extremes

* New extreme

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Stock And Sector Sentiment

Go to sector breadth charts


The rally over the past several weeks has been concentrated in some of the more speculative sectors, such as Financials, Technology and Housing, while defensive sectors like consumer staples and Utilities haven't participated as much.  This isn't necessarily a bag thing, but when those speculative sectors get so overbought, the broader market generally takes a multi-week breather, or at the least price gains tend to moderate and flatten out.



See this Data Brief for more background on the Sentiment Scores


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Currency / Commodity Sentiment

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With the correction from extremes in many currencies over the past couple of weeks, sentiment towards the US Dollar has become less enthusiastic, which is normal.  Traders have moved more into the Aussie Dollar.  We're also seeing some extremes in the energy contracts, particularly Unleaded Gas and Heating Oil.




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