Sentiment Signals for Market Investmentsby Arthur Knopf, Financial Economist and Contrarian

Today is going to be a long post, at least in terms of charts, since am introducing new sentiment charts for two new stock indexes.  For the Russell 2000 (RUT), I will use the short/long ETF pair TZA/TNA, and for the Nasdaq 100 (NDX), I will use the ETF pairs QID/QLD and SQQQ/TQQQ.  All charts are shown since July 2014.

First for the broad market (SPX) everyone knows that bearish sentiment is high, but several measures show that it is not as high yet as Oct 2014 or Aug 2015.

Composite#1 uses Put/Call, VXX $ Volume, and Skew, and the high Skew readings due to elevated put premiums have indicated low bearish sentiment or high risk since Oct. 2015, and overall has only last week moved into a moderately positive stance.

Composite#2 uses Put/Call, VXX $ Volume, and VXV/VIX.  Here, we see that the short and intermediate (5, 10 dy ema) now exceed the +1 SD extreme, but the 20 dy is only at 1.1 compared to > 1.6 for both Oct 2014 and Aug 2015. Hence my argument for an "L" type bottom (lower for longer) to allow the longer term sentiment to rise to an extreme.

The SPX ETF measure SPXU/UPRO shows much the same result as Composite#2.

The RUT ETF sentiment ratio TZA/TNA is a classic example of how sentiment should effect stock prices over the long term.  In late 2014 and early 2015, bearish sentiment was very high and the result was a 20% advance through the first half of 2015 or almost twice that of the SPX.  However, the second half of 2015 saw consistently low levels of bearish sentiment, and the RUT has now given up all its gains since Oct 2014 and more.  The period starting in June 2015 is where I see the bond chart posted last week.

Both the RUT and NDX ETF sentiment measures showed a strong warning of a decline at the end of December when bearish sentiment spiked to a low extreme.  For the QID/QLD sentiment indicator, short term measures are high, but long term (20 dy) have not yet reached +1 SD at 1.3 where Oct 2014 and Aug 2015 declines reached 1.6.  The NDX appears likely to test the 3800 level before a significant rally.

The NDX ETF pair SQQQ/TQQQ shows similar results, but given the low level of shorts to longs b dollar amount, it is probably less reliable.

Finally, for the gold miners HUI index, the sentiment using DUST/NUGT seems to be getting worse every day (less bearish).  The rapidly declining sentiment as mining stocks are stuck in a narrow trading range is very similar to mid-2014 which resulted in about a 30% decline.