Saturday, April 16, 2016

Sentiment Review - Composites and ETFs

Weekly outlook gain/loss. Last week I started posting a weekly position strategy by projecting a rally through option expiration.  Gain from last weeks close to this weeks close SPX 2048 to 2081 is +33 pts.  Over the next two weeks I am expecting a 2 to 4% pullback from a possible Mon gap up then down into the next FOMC Apr 27/8.  Short from SPX 2090 if hit.

Over the last two weeks I showed how one of the composite indicators, the Students Trifects (VIX term structure, overbought/oversold, and TRIN indicator) gave a sell signal, but I still had reservations based on the neutral position of the volatility measures.  This week I will discuss two of the other composites as well as review the cash flow measures derived from the short/long ETF pairs for the SPX, NDX, RUT, HUI, NBI and TNX.  As a whole these indicators are slightly bearish, indicating a pullback is likely but a final top has not been reached.  As a final note, the VXX $ Vol sentiment did reach a low enough level for a "weak" sell.

The first composite (#1) is the SPX P/C, VXX $ Vol (adj) and SKEW.  I had been expecting something like the sharp decline similar to the Oct 2015 rally, but the current position is more like Feb 2015, supporting more choppy market behavior.  A low SKEW keeps this indicator from being less bearish.

The next composite (#2) is CPC Rev, VXX $ Vol, and VIX term structure.  This composite is more bearish and is at similar levels to both the Feb and Nov 2015 tops.

The next two indicators are for the SPX ETFs for the 2x SDS/SSO and 3x SPXU/UPRO.  Both measures are at positions comparable to the Nov 2015 top, but sentiment has not reached a level extreme enough to expect more than a short term pullback.

The large cap tech sector, NDXrepresented by the 2x QID/QLD and the 3x SQQQ/TQQQ are also at positions comparable to the Nov 2015 top, but sentiment has not reached a level extreme enough to expect more than a short term pullback.

For the small cap RUT index represented by the 3X TZA/TNA ETFs, sentiment is slightly more bearish than at the Nov top.

For the gold miners, represented by the HUI and the 3x DUST/NUGT ETFs, sentiment has reached an extreme normally warranting a sell, but as I pointed out a couple of months ago, the extreme sell level is likely to remain for several months to balance out the six months at the extreme buy level the last half of 2015.  The result is likely to be a trading range.

The biotech sentiment indicator represented by the NBI index and the BIS/BIB ETFs is probable the most surprising result since a 10% rise in price has caused sentiment to drop to neutral.  However, comparing this to the sentiment for HUI, the largest part of the rally for the HUI in early 2015 and 2016 occurred after sentiment dropped below neutral, perhaps that is the "recognition" phase.

Finally, looking at the sentiment for bonds using the TNX as the index with the TBT/TLT ETFs, sentiment remains in the extreme low bearish level.  Since bonds and gold are seen as safe havens, perhaps both will fall when an increase in confidence in the economy is seen. Note that since interest rates and bonds move inversely, low rates equal high bond prices.

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