Tuesday, September 5, 2017

Investment Diary

2018.03.28 Dumb Money/Smart Money Indicators were added on March 24, 2018 here.  This represents a project that I have been working on off and on for two years. 
  1. The first indicator is a very short term indicator yielding several signals (buy/sells) a month.  The exact formulation is considered proprietary for now, but consists of a Dumb Money component divided by Smart Money component(s).  One feature is the removal of much of the cyclicality which makes interpretation difficult at tops and bottoms.  A separate component is included to show the cyclicality factor.  The primary indicator is shown below taken from the Mar 24 blog.

  2. As you can see below the indicator gave several buys and sells in the volatile Aug 2017 period and became extremely bullish in Nov 2017. The two sells in Jan were followed by a one day SPX 30 pt decline then the Jan 31 sell was followed by a 300 pt decline. The Mar 15 sell at SPX 2750 has seen a 165 pt decline so far. Current sentiment has risen only to just above neutral, but much of the signal is directional and we have now reached the level of the recent SPX 2647 low before the rally to 2800, so a 150 pt rally may be expected soon. The two declines above started two days after the signal and many signals seem to occur during consolidation periods or "nests" as some analysts call them as investors position for the next move, when dumb money positions for a rally and smart money positions for a decline, watch out below.

    The second component of this indicator is a cyclicality version when combined with the BPSPX/CPCE ratio. Here we see that the cyclicality version is similar to the ST Composite and would support a stronger than SPX 150 pt rally. The cyclicality seems to magnify signal strength in the same direction and dampen for the opposite direction.

  3. In addition, I decided to apply the concept to the SPX and NDX ETFs, where the long term sentiment (2x ETFs) is considered the Dumb Money and short term sentiment (3x ETFs) the Smart Money.  For the SPX this is (SDS/SSO)/(SPXU/UPRO) and for NDX (QID/QLD)/(SQQQ/TQQQ).  I will compare one year results for 2017-now and 2015.

  4. The SPX Long Term/Short Term ETF Indicator is quite consistent for both periods.  For the current period,  more smart money flowed into the market at the beginning and end of 2017, while more dumb money flowed in before the July and Aug 2017 pullbacks as well as the Dec 2017 and Jan 2018 tops. The outlook is much more positive for the SPX than the NDX, now reaching the equivalent of the May and Aug 2017 lows.

    In 2015, there is some sign of a cycle extreme early in the year, but by May the signals were right on with the indication of a top in May, July, Aug and Dec.  The strong buys after the May and July rallies were a little off but were switched before the next significant downturn. There is a big difference after the flash crash retest as sentiment stayed low thru Dec, while in 2018 there seems to be a more positive outlook as of Mar 23.  It is possible that the 2018 result will not be as long term negative or perhaps this will be quickly reversed as we saw in June of 2015.

  5. The NDX Long Term/Short Term ETF Indicator does not show the consistency as the SPX Indicator since 2017-18 shows a high degree of cyclicality making longer term calls more difficult, but 2015 did show a high degree of consistency.  To date I have little explanation for the cause of the cyclicality.

  6. But this does not seem to be a problem with the shorter time period for 2018. A strong warning was given for the Jan top as well as several of the more recent downturns.  The buy for the early Feb bottom seemed to come early, but seemed to coincide with the momentum bottom and not the price bottom.

    In 2015, the NDX Indicator worked almost to perfection, calling many or the market turns with the exception being a weak indication of the Aug flash crash.  The slight upward trend may be an indication of longer term bullish outcomes.

  7. Looking at the ETF Long/Short Term Sentiment Indicators for 2014-2018 gives some perspective and clarifys the cyclality problem with the NDX ETF.  The SPX showed the greatest level of bearishness for the Long Term ETFs in 2014 and since the SPX has risen 50%.  Note that the current level of bearish sentiment is more similar to the Feb 2016 lows than the period after the 2015 flash crash which may mean a more bullish outcome than late 2015.

    The NDX ETF Long/Short Term Sentiment Indicator for 2014-2018 showed its highest level of bearishness in 2014 when the NDX was 3,500 and since doubled.  The result is that now sentiment has reversed with the long term bearish sentiment at its lowest level, indicating high probability of a long term top for the NDX.

2018.02.23 ETF Sentiment Revision - When first developing the ETF sentiment measures using short/long ETFs similar to put/call ratios, I noticed that many of the ratios showed "poor fits" over long periods of time and added I added a moving average component to compensate. This seemed to solve most of "decay" problem and was used for all of the ETF ratios except for the HUI, TNX and BKX indexes. In 2018, the drop in January and rally in Feb showed distortions in two 3x ETF categories, first the BKX making it too bearish at the bottom and the NDX making it too bullish at the top. This section documents the changes to hopefully fix those problems in the future.
  1. First the BKX 3x ETF ratio FAZ/FAS was changed from the simple ratio to the ratio with moving average.
    • The original simple ratio show a strong BUY in mid 2015 for the BKX and has show a SELL for most of 2017.

    • The revised ratio using the moving average adjustment was much more responsive the price highs and lows including a SELL starting in late 2017 and a BUY at the recent lows.

  2. Second the NDX 3x ETF ratio SQQQ/TQQQ was changed from the ratio with moving average to a combined simple ratio and ratio with moving average adjustment.
    • The original ratio with moving average adjustment showed a SELL for late 2016 into early 2017 and the a BUY from late 2017 into 2018.

    • The simple ratio showed a BUY for most of 2016, switching to a SELL in mid 2017 and late 2017.

    • The combined simple ratio and ratio with moving average adjustment was similar to the moving average measure but was less bullish at the end of 2017 and early 2018 with a SELL near the top, moving to a BUY after the late Jan/early Feb decline.

2017.10.27 Indicator Primer - this entry is dedicated to new readers and others to provide a quick overview of the various indicators I use and what they mean

  1. The VIX call indicator is the last indicator I added and is based on the last two years of noticing that the VIX P/C went to extremes at market tops and bottoms.  Finally, I identified the source as the VIX calls.
    • Why does it work?  Let's say that a member of the PPT (buyer of last resort) which happens to be a big bank (GS) has an arrangement with the govt (FED) so that for the use of personal capital to prop up the markets, the bank is given advance notice of a potential market disruptive event (Don and Kim nuking it out).  Said bank then approaches a large option writer (pension fund as CalPERS or TRS/TX who writes options to collect premium income) to write $200M VIX calls (1M contracts $2/call). After selling VIX calls, writer sells ES futures to hedge position, driving down market temporarily.  Market goes up for a few days after making writer fell good, then "unexpected event" happens causing sharp drop in stock prices.  Bank sells calls after doubling purchase price to panic buyers, then steps in to buy up market, driving stock prices higher.  Bank wins, option writers win, panic buyers lose.
    • How is it calculated? Two things that I wanted to show were how the number of VIX calls varied compared to the average  and how they varied compared to stock prices.  There are probably an unlimited number of ways to show this, but I decided on using the number of calls divided by the 10 day simple moving avg and to graph the values I subtracted 1.0 to make the y-axis 0.0.  For the SPX stock price, I used the SPX divided by the 20 day simple moving avg, subtracting 1.0, and converting to a percent.  For comparability graphing, the SPX % is divided by two.  The logic is discussed here.  The result was fairly easy to see in a back test prior to the Aug 2015 flash crash, where the volume rose by about .5 or 50% from the lows at market peaks.

    • Current examples are more complicated with the popularity of VIX hedging by smart money and speculation by dumb money causing spikes at bottoms as well. Below is EOM Sept.

    1. The Short Term Indicator (VXX $ volume and Smart Beta P/C) is an equal weighted composite of the two most highly correlated indicators with the SPX ex ante (future) returns discussed in the methodology section of the Indicator Scoreboard below.  The VXX $ volume is the daily price times volume divided by a long term moving average.  The Smart Beta P/C was derived from a couple of articles I read about smart beta portfolio management where one buys out performing stocks (Apple, Google, Amazon) and hedges with a similar index (NDX).  I decided to use a similar put/call ratio using the CBOE listed ETF puts/Equity calls.  The results were better than expected and the indicator soon became one of my favorites.

    2. The overall Indicator Scoreboard was developed in March thru May of 2016 starting with 16 indicators listed here in Mar 27.  The Smart Beta P/C was added on Apr 3 here.  On Apr 23, I developed a table showing the correlations between about 20 indicators from Apr 2014 to Apr 2016 and the ex ante SPX returns from 1 to 12 weeks following the indicator data.  The 16 indicators with highest correlations were selected and combined into a composite weighted by the correlations.  The standardized variable approach was used to allow variable comparability.  The total was then scaled to show a range of +16 (all bearish, strongest BUY) to -16 (all bullish, strongest SELL).

    3. ETF short/long ratios were developed to show the same relationship as Put/Call ratios using daily $ volume for ETFs representing the SPX, NDX, HUI, and TNX plus a couple of sector indices.  These are considered as money flow indicators showing the ratio of short/long $ amounts invested in each index.  As with the other indicators, a move to a high bearish sentiment (+1 std.dev. over mean) is a BUY, while low sentiment (-1 std.dev) is a SELL.

    4. Options Open Interest was added on May 20 here as a means of improving my short term timing.  The methodology is used at Sassy Options for week to week timing, but I found it informative to look out as far as three months.  Open interest in puts represents support for stock prices, and like-wise calls represent overhead resistance.  Once support/resistance is broken something called delta hedging, driving prices further in the same direction, can occur when the option writers are forced to hedge their losses by buying futures (price above calls) or selling futures (below puts).  I have used this appproach for SPY, GDX and VIX, but it can be used for any option.  The most common approach is to identify support/resistance zones much like EW pivots.  Below are a couple of charts from July 22 for the month of Oct where the SPY showed strong put support and little call resistance up to 249, while the VIX showed very strong call resistance above 14.  The conclusion was that any pullback in Aug would be reversed strongly into Oct.

    2017.09.05 - of interest to day traders
    • Today, I noticed a repeat of a pattern that started the week before the August options exp and since next week is options expiration, perhaps we are seeing a repeat.  There were two items in particular, the first is the options open interest.  I generally do my weekend posts on Sat, but sometimes the open interest changes significantly since option contracts settle on Sat evening. The last time in Aug, I saw the update at Sassy Options and posted the update on Twitter, but two days later the market crashed thru the "new put" support, so I thought it may be a data error.  However, the same thing happened this weekend.  My conclusion using the OI chart here was that we would see a drop to SPY 246 (act 245) early in the week, while Sassy concluded the SPY would stay over 247 with the "new put" support.  What this tells me is that this is a "smart money" indicator, similar to VIX calls, where someone has advanced knowledge of a selling event.
    • The second similarity to August was the CBOE put/call intra-day update.  On Aug 10, the market opened flat/down but the P/C ratio total was 1.4 with the SPX p/c ratio the first half hour almost 8.0 - the SPX close was down 36.  Today;s first half hour total was 1.24 with the SPX only at 5.0.  Again "smart money" seems to know what is going to happen before it happens.
    • Probably a coincidence, but Aug 7 the SPX closed at 2481, Wed exp week closed at 2468 and Fri exp closed at 2426.
    © 2018 SentimentSignals.blogspot.com


    1. Arthur, you can get a live update of the charts you get from Sassy at: opricot.com/ticker/spy/optiongraphs

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