It has been about six months since I completed my sentiment timing model with additions along the way, so I want to start by reviewing the intermediate term signals that have been generated.
My first signal, posted November 3, was following the strong October rally after the late August crash in 2015. At that the EWers had declared the start of a primary 5 wave that would take the SPX to 2300 to 2400 the first half of 2016. For technical support they pointed to the Zweig Breadth thrust as confirmation. However, using the SPX put/call ratio, VXX $ volume and Skew as Composite #1, the sentiment model generated a sell signal here (link to post). At the time, I noted that momentum would probably carry the market for a few weeks, but that I expected a 10% plus decline in Dec-Jan. Everybody thought I was crazy.
My second signal, starting Jan 23 when I introduced the Students Tricecta (VXV/VIX), SPXA50R / SPXA150R, and TRIN), I showed that comparison to the 2008-09 bear market indicated a bottom was near, here. Later, on Feb 6, I noted that the Low VIX Put/Call Ratio indicated that a washout (retest of lows) was likely and that would be followed by a sizable rally, but unlikely to make new highs. At the time, the EWers had declared a new bear market and were calling for SPX 1600 or lower by March with a longer term target of SPX 1100. Everybody thought I was crazy.
My third signal, posted today is a sell based on various indicators of which I am showing the Students Tricecta today since I was able to back test it for the 2008-09 bear market and I think It may show some insight into the future. Note that this is an intermediate term signal, and I expect the market to show strength into the middle of May and may possibly retest the highs of SPX 2135. However, over the past few weeks I have given a target of SPX 2080 and doubt if is exceed by more than 1-2%. It is interesting that many EWers have now declared a new bull market this time based on the overwhelming strength of the NYMO and NYSI. I am sure that everyone thinks I am crazy again. Maybe this time is different.
Re-posting the Jan 23 chart for comparison, I want to point out what happened in May of 2008. After a sharp Dec-Jan decline that took thw DJIA down from 14,000 to 11,500, the DJIA rally back to 13,000 in May and sentiment had fallen to an even lower bearish extreme than it was at the Oct highs. Given the fact the SPX has been has been in a range of about 1800 to 2100 for two years, I expect to see even greater extreme lows in bearish sentiment before a breakdown of that range.
The rest of this post discusses minor updates to my sentiment model. I had some difficulty in interpreting the VXX daily $ volume the last week of Dec that kept me from being as bearish as I should have been. Namely, even though to $ volume met my criteria of 50% of average daily volume, the overall market volume was also about 50% of normal, so the reading was unclear. Therefore, I have added an option to calculate volume relative to the daily S&P 500 volume. The results are shown below.
The differences are fairly minor other than the noticeable drop for the end of 2015, but still maintaining the sell level.
Next, I want to introduce a new sentiment measure on a trial basis that I came up after reading a couple articles on smart beta portfolios where portfolio managers may take sizable positions in certain stocks (equity calls) to raise their alpha but offset the risk by hedging the risk by shorting sectors (ETF puts). So to duplicate the result I am using the ETF puts/equity calls obtained from the CBOE to create a smart beta put/call ratio. I am not sure if this adds any new information since I already track the ETF p/c and equity p/c, but it sounded like an interesting idea. I have also noticed that the number of calls in the equity p/c are about 50% greater than puts, while for ETF and SPX puts are about 50% greater than calls.
This ratio is faster moving than normal put/call ratios so may be better for shorter time periods. The sharp spike mid-week did warn of an end of week rally.
Looking at the overall indicator scoreboard, the score dropped to a -8 from -6 last week, with 1 up, 9 down, and 6 neutral. Equity p/c dropped from positive to neutral, while ETF p/c went from negative to positive. The cash flow measures SDS/SOS and SPXU/UPRO went from neutral to negative. The volatility measures (VXX $ vol, VIX p/c and Skew) are all neutral, so only moderate volatility is expected short term.