Thursday Color - Gold flow and open interest, bond flow, VIX call buying, Hang Seng rollover
Here's what's piquing my interest as stocks mostly reverse yesterday's gains. One would think that any technical traders out there would be selling enough to close the gap should we lose the intraday lows of the past few weeks.
Gold Flow
Despite some shaky days lately, ETF traders don't seem too put off by gold. Shares outstanding in GLD have jumped by more than 5% in a little over a week, one of the biggest jumps in years.
In recent years, such a quick surge in assets has been a worrying sign of too much enthusiasm, but during the last bull market, had no adverse impact.
Curiously, shares outstanding in GLD rose by more than 1% even as the fund fell by more than that amount.
That may seem like traders are trying to buy the dip, but it could also be short-sellers moving in.
Regardless of who is doing what, similar behavior hasn't led to anything consistent for GLD's forward returns, other than mostly positive results over the next month, thanks to most of these occurring during the bull run earlier this decade.
Renewed interest in metals is also showing up in the futures market, where combined open interest in gold and silver futures contracts is nearing an all-time high. Open interest in these contracts tends to wax and wane along with prices, and should be a bit of a concern for gold bugs.
Silver was able to go on more of a run after a couple of those spikes in open interest.
Bond Flow
There has also been a surge in flows to the most popular bond fund, TLT. Over the past few days, it has taken in an average of more than $500 million per day, nearing the most since inception. The last time there was a big inflow, TLT rose rapidly, but prior to that, it was more of a contrary indicator.
If we look at the shares outstanding, we can see that it hasn't just been the last few days that have generated interest in TLT - it's shares outstanding have been climbing steadily for almost a year.
Huge swings in assets over such a long time frame have been a decent contrary indicator for the fund, suggesting some medium- to long-term trouble for TLT.
VIX Bets
The WSJ notes that some big traders have been trading calls on the VIX "fear gauge", ostensibly bets that volatility is going to pick up soon, almost certainly meaning they're bets on a market decline.
That's showing up to some degree in the VIX Put/Call Ratio, which has moved to a low level over the past few sessions (low put/call ratio suggests a lot more volume in VIX calls than puts). But in recent years, low readings in the indicator haven't translated to consistent jumps in volatility.
When we substitute the S&P 500 for the VIX and test it, we can see that it was even less successful in preceding declines in stocks.
This doesn't seem like it should be much of a worry.
Trend Struggles
A good rule of thumb for long-term indicators that are range-bound by 0 to 100 is that healthy markets see the indicator hold above 60 for long periods, with forays below 40 usually representing buying opportunities. During unhealthy markets, the indicator usually hangs below 40 most of the time, and the market sells off quickly after the indicator reaches 60.
This mostly holds true for many of our Optix calculations on commodities, and long-term breadth indicators for stocks like the % of them trading above their 200-day averages.
A good example is on the Hang Seng. There was a minor breadth thrust earlier this month, pushing the % of stocks in the index trading above their 200-day averages above that 40% area, but it quickly failed.
Now it's down to about 20%, which is nearly extreme territory. But it hasn't been consistent enough as an extreme to suggest a bottom - it can drag along this level for months as the index continues to slip lower. Only when it nears zero has it been a better indication that sentiment is near totally washed out.
For those looking for a long-term opportunity in some of these shares, it's a disappointing development, as it needs to show the ability to hold more of its stocks in uptrends without rolling over.