Last week I reported mixed sentiment and this week we have similar results with the SPX advancing from 1865 to 1915. Looking at all sixteen indicators, last weeks score was 6/16 with 9 positive, 4 neutral and 3 negative. This week the score has dropped to 4/16 with 8 positive, 4 neutral and 4 negative as the overbought/oversold indicator(SPXa50r/SPXa150r) moved to a negative.
The big news is for the HUI (DUST/NUGT) as bearish sentiment dropped to a low extreme as the chart below shows It is interesting that Hulberts Digest Newsletter Survey just reported the same results. However, I am less bearish than Hulbert due to the large buildup of high bearish sentiment the last half of 2015. The most likely scenario is a 3 to 6 month trading range, aka the first half of 2014, until volatility subsides in the stock market. Unlike most, I expect a fairly positive second half of the year for stocks after a summer swoon, as Wall Street pulls out all stops to protect the $100 million plus investment in the Clinton campaign to preserve the status quo.
The rest of this post is an update to the Students Trifecta model where I am replacing the BPSPX/CPCE indicator with the original TRIN variable and BPSPX (TRIN/BPSPX). TRIN does not fit well in my model as most use log tranforms so I had to come up with another approach.
Below is the TRIN/BPSPX, here I found that the BPSPX improves the cyclicality.
The revised Students Trifecta ( VXV/VIX, SPXA50R/SPXA150R, and TRIN/BPSPX).
Short term outlook.
Looking for a drift lower into early-mid Mar, possible IHS at SPX 1820-30. Fed announces second rate hike, then pauses until after election plus ECB additional QE. Stocks stage strong rally, SPX 2000+ Apr-May. Then crash down into 1700s in summer swoon, aka 1957, 1969.
Today, I am going to do something a little different, which is focus on sentiment components rather than composites. The reason is that some indicators are showing a strong buy (SPX), while others are showing a sell, and when combined I get a neutral signal. For instance, the put/call ratio for the CPC and CPCI (less VIX) are neutral, while the equity P/C is a strong buy and the ETF P/C is a sell. First, I will show the charts for the latter P/C ratios as well as the VIX term structure for the SPX (VXV/VIX) and NDX (VXN/VIX), and try to explain what I think is going on. For the gold bugs, no charts, but sentiment is neutral so no big selloff is expected.
The equity P/C shows extreme bearish sentiment about equal to the Aug 2015 selloff.
The VIX term stucture (SPX) also shows extreme bearish sentiment similar to Jan 2015.
The ETF P/C, however, tells a different story with bearish sentiment below the mean similar to early 2015 and the Nov 2015 top.
The VIX term structure (NDX) is not as reliable as the SPX form, but again the low readings are more consistent with tops than bottoms.
What I decided must be going on is that the average stock, represented by the equity P/C and VIX term structure (SPX), has been a bear market for over a year and sentiment has now reached a bearish extreme indicating a buy. However, the large cap stocks (ETFs), especially the techs (ie, FANGS) that have been holding up the averages still have further downside before a significant rally is expected (ie, 10-15%).
So if you are a stock picker now might be the time to start picking up beaten down stocks (gold miners might be an example of what to expect), otherwise lower lows are expected for the averages. I have using NDX 3800 as a target since mid-Jan and with trend lines from 2009 coming in around SPX 1750 and NDX 3780, a strong rally from those points is expected when/if reached.
Everyone looks at put/call ratios occasionally, but the CBOE publishes data on other ratios than the widely followed CPC (combined) and CPCI (index). Two of my favorites are the SPX and VIX P/Cs. After the 2007-08 bear market, there was a huge growth in volatility products to hedge risk, and this included puts and calls on the VIX. CBOE includes VIX calls in the calls for both CPC and CPCI, likewise for puts, so to eliminate the distortions, I use modified CPC and SPX for CPCI.
To get back to the main subject, a large volume of calls on the VIX is a bet on increased volatility. Friday for instance the VIX P/C was 0.14 with 700k calls or 30% of the 2.4m reported for the CPC and almost 60% of the calls in the CPCI. The reported CPCI, for instance, was .81, but without the VIX calls the number jumps to 1.80. The SPX P/C was 1.79.
So what does this mean for an investor? Long-term the VIX P/C averages about .50. VIX call buyers tend to be "smart money" investors, such as hedge funds and pension funds, looking for a way to hedge risk.For instance, for the five days from Dec 29, 2015 to Jan 5, 2016 the VIX P/C averaged .25 and the next two weeks the SPX dropped from 2017 to 1812. Before that in mid-Aug 2015, the five day average dropped to .30 before the Aug crash. Friday, Feb 5, the 4-day avg dropped to .2 and the 5-day to .30. What are VIX call buyers afraid of?
The following shows a VIX P/C sentiment chart with the current 5-day EMA at .30.
The next two charts show updates for the composites, #1 (P/C, VXX $ Vol, Skew) and #2 (P/C, VXX $ Vol, VXV/VIX).
Composite #1 remained steadfastly bearish (low sentiment) from Sept thru mid-Jan, mostly due to the Skew which remained in the mid-140s, only recently dropping below 120. This composite is now bullish. Composite #2, below, is also bullish, but not as mush so as after the Aug crash and retest.
Overall, sentiment seems to be pointing to some type of short-term washout using the VIX P/C, followed by a sizable rally of several months, but no new highs.
