I did not develop my two main composite indicators, the overall weighted Indicator Scoreboard and the Short Term Composite (VXX $ Volume and Smart Beta P/C) until May, but today I want to back test these indicators to compare the positions at the end of 2015 to today.
The Indicator Scoreboard from 2015 showed similar behavior in bearish sentiment before both the August 2015 plunge and the December 2015 selloff with an initial SELL (at -10) followed by a rise and short covering rally then a decline in bearish sentiment to a less bearish -8.0.
Now comparing this to the 2016 Indicator Scoreboard, we can see a similar pattern from July through November 2016. In fact, the overall Indicator Scoreboard is in the same position as at the end of Dec 2015 immediately before the January plunge.
The Short Term Indicator shows a slightly different story, however. Following short covering rallies in 2015 the STI dropped to the -.40 level before both the August plunge and the December top and even in Oct 2014 had dropped down to the -.20 level.
So far in Nov 2016, however, the STI has not even reached the .00 level and it is likely that a drop to -.30 to -.40 occur before a significant pullback.
One other indicator that I have been watching for confirmation of a top is the bipolar VIX P/C which can see upward spikes when smart money bets on volatility declines at market bottoms or when dumb money bets on volatility declines at market tops. This time we saw both with a pre-election spike by smart money followed a week later by a dumb money spike betting on continued volatility declines. The later confirms a top as in the May, August and December tops of 2015.
Conclusion. A significant top may be in (Indicator Scoreboard), but a significant decline is not imminent (Short Term Indicator).
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