Saturday, March 5, 2016

Sentiment is Becoming Less Bullish

This weekend I will be reviewing the Students Trifecta Model (VXV/VIX, SPXA50R/SPXA150R, and TRIN/BPSPX), including instructions on how to create charts for the components using, as well as a number of the short/long ETF pairs (ie, "synthetic" put/call ratios).

The current Students Trifecta is representative of the overall sentiment picture as shown below.  Bearish sentiment has now declined to about the same level for the SPX as in Oct 2015 when the SPX was about at 2010.  At that point we were about three weeks from the Nov top at 2116,  So it is possible on sentiment comparisons that we reach SPX 2100. but it is more likely that a top is reached in the 2050-2080 range.  The SPX 2080 target has nice symmetry for a bear market scenario since it is the 78% retracement for wave A down, and if C = A then the next target lower is 1760, my target for a "summer swoon".

Looking at the individual components, two are available intraday (VXV/VIX and TRIN/BPSPX) for those that want to check sentiment readings during market hours.  All three components are tracking the Oct 2015 rally very closely, so hopefully will warn of a top when similar readings are reached. When using, each variable is preceded by a "$" with the divide "/" replaced by the ":".  For example, the VIX term structure VXV/VIX is input as $VXV:$VIX.

For all charts under chart attributes I use dashed lines for daily data and check log scale, under indicators I use Price, $SPX and behind price.  For the VIX term structure, I use a 1 year period/daily and under overlays use a 10 day SMA and horizontal lines at 1 and 1.2, where the top is usually when the 10 MA nears 1.2. For the TRIN/BPSPX, I use a 6 month/daily period with a 20 day SMA and this produces a nice sentiment chart with lows at tops and highs at bottoms.  For the overbought/oversold indicator (SPXA50R/SPXA150R), I use a 1 year/daily period with a 20 day SMA and horizontal lines at .65 and .95.  One last note before saving the chart link, below the chart click Permalink, Reload with link to create the final link.

The amazing thing about these indicators is how closely they are tracking the Oct 2015 rally with each at comparable positions to about 70% completed or about SPX 2080 for a top.

Finally, I want to show updated ETF-based sentiment for the SPX, NDX, RUT and HUI.

Using the SPXU/UPRO to measure sentiment for the SPX, you can see that sentiment is comparable to Oct 2015 when the SPX was at 2010 similar to the Students Trifecta.

Using the SQQQ/TQQQ for the NDX, we can see higher bearish sentiment for the NDX than the SPX, so the NDX is expected to outperform for the remainder of the rally.

Using the TZA/TNA for the RUT, we see that bearish sentiment is below average, indicating weaker expected performance compared to the SPX.

Finally for the HUI using DUST/NUGT, we see that sentiment has reached lower extremes, but is likely to remain in a trading range from 150 to 200 for the next few months similar to the first half of 2015.

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