Trader’s Narrative

Today Charles from the Kirk Report hosted a chat with Jason Goepfert. Here is an excerpt in case you missed it:

Yesterday’s bad start didn’t do much to tell us about what the rest of the month may hold. It wasn’t a great sign, but the last three times the S&P lost 2% on the first day of a month, the rest of the month gave returns of +14.2%, +15.7% and +3.2%….

Yesterday, columnist Mark Hulbert penned a piece highlighting October’s penchant for high volatility…

But here’s the thing…when the S&P showed a positive return over the prior month, then the average daily change in October was only +0.60%. When the prior month was negative, then the average daily change in October was +1.24%. This is an enormous difference - the average October day after a bad September was more than twice as volatile as when it followed a positive September.

Seems to me that we could be in for less volatility than normal due to the tame market over the past couple of months, and yesterday didn’t change that.

The chat was opened up to questions:

So, stepping back a bit, in your “big picture” sentiment analysis, do you have any perspective on where we might be within it right now?

Hmm, I would say somewhere near “denial” and “returning confidence”. There are a lot of arguments on both sides, which all seem cogent, but based purely on how I view sentiment, we’re not yet at an optimistic extreme, but we’re well off the “aversion” levels too.

And regarding the tip off for the end of this rally:

The biggest test for me is always how the market reacts to short-term overbought/oversold extremes. Every time we’ve hit short-term oversold since March, the market has recovered very well. Now we’ve seen a pattern of lower highs and lower lows for the second time (early July was the first), and we’ve short-term oversold. If we can’t rally from conditions like this, it is a definite warning sign that there is eager selling pressure.

Jason also featured these two disparate charts which answer just how much speculative activity we are seeing and in what form:
Continue reading ‘Today’s Chat With Jason Goepfert & Charles Kirk’

We’ve touched on the epic amounts of cash that are sitting on the sidelines in money market funds. There is some debate about how positive this is for the market so let’s take a closer look by going over a few details from both sides of the argument.

Money Market Levels
Now that we have stepped away from the precipice (or so it would seem), it may be difficult to imagine the magnitude of fear that drove the vast majority into the safety of cash. At its zenith, we had almost half the capitalization of the total US stock market sitting in money market funds.

Here’s a chart of the aggregate US equity market capitalization compared to the total assets held in money market funds (click to see full size chart):

And at the March 2009 low, for the first time in 16 years, US money market funds had more assets than US equity mutual funds: Tsunami of Cash Waiting to be Invested. Since March 9, the value of U.S. equities, measured by the Wilshire 5000, has increased by $4.4 trillion. And from its high the level of total mutual fund cash has fallen by $341 billion.

However, before you get excited and start to think this means we are about to embark on a wild bull market, consider the astute point made by Gestalt: that the increase in money market assets may be a mirage as corporations have shifted short term liquid assets from commercial paper to institutional money market funds.

Mutual Fund Cash Levels
Jason Goepfert wrote an award winning research report in 2004 regarding the signal value of the level of cash held by mutual funds. You can get a copy of the research report from the free trading resource section (Charles H. Dow Awards folder).

As you can imagine, it is an important point in all this is that nominal interest rates are negligible. This means there is little incentive to park assets in cash. But then again, if you follow the strong indications of deflation, the real interest rate is 6.5% - which is actually a significant incentive to just let your money grow (albeit slowly) with near zero risk.

Unfortunately, Goepfert’s research report does not take into consideration inflation or deflation but simply adjusts the level of mutual fund cash levels according to the 90 day T-Bill rate. I’ve sent him a message about this so hopefully when he’s back from vacation he can update it with this new twist thrown in (here it is: Mutual Fund Cash Levels - Adjusted for Inflation).

In any case, right now, this ‘rate adjusted’ model is smack dab in neutral territory. Not helpful at all. It was moderately bullish at the spring low but since then, as the market has improved and as sentiment has thawed, this indicator has backed off into ‘no man’s land’.

NYSE Free Credits
You’re probably familiar with Margin Debt levels, which measure the level of liability in brokerage accounts. Free Credit statistics in contrast, reflect the available, free and clear cash that investors are holding in their trading accounts. This data is released regularly by the NYSE and shows how much liquid assets are held in aggregate by clearing firms overseen by the NYSE.
Continue reading ‘Mutual Fund Cash Levels & NYSE Free Credits’

The first time we looked at the Credit Suisse Fear Barometer, it didn’t look like it had anything useful to offer. But using it in combination with its competitor, the VIX index, it may yield surprising insight into options sentiment and the stock market.

The VIX has declined from its stratospheric highs to reach close to its long term average of 20. That may suggest that there is little fear in the market. But that isn’t really accurate because right now traders are willing to pay more for put options than for (equivalent) call options. We can tell that because the CSFB is higher.

The last time we had a CS Fear Barometer rising while the CBOE volatility index was falling was in early May 2008 (shown above) - just before the S&P 500 rolled over into another waterfall decline.

Source: Battle Of The Fear Indexes

That is just one instance but the others also provide the same general idea. The S&P 500 has a very tough time on average, going up when the VIX has fallen and the CSFB has gone up.

So it seems the ugly duckling of an indicator has suddenly become a swan. When paired with the VIX, the CSFB seems to unfold even more meaning for the stock market.

Check out my original review of SentimenTrader.com to see why I highly recommend Jason’s insights. As you can see from the above analysis, he’s well worth your money.

Here is the sentiment overview for the last week of the month (in terms of returns, the worst January ever!):

AAII
The American Association of Individual Investors’ weekly sentiment survey had 47% of respondents bearish and only 25% bullish. That may seem like good odds for a rally… except that we’ve been hereabouts before (in late 2008) and yet the market weakness continued.

Investor’s Intelligence
This week’s II sentiment survey shows the bears at 38% and the bulls at 34.8%. This is a continued amelioration of the exuberance that we’ve seen for the past several weeks, but it still leaves the two camps, more or less, equal to one another.

Fund Flows
Yesterday we talked about the lack of IPOs which are in a sense, supply of “paper” to the market. On the other side stands the fund flows which measure the demand for equities through the purchase or sale of mutual funds.

Not surprisingly, mutual funds have undergone a scorched earth scenario where for more than a year, we’ve hardly seen net inflows:

Source: Data by AMG Data and chart by SentimenTrader.com

Although this data has a contrarian tinge to it, there is nothing bullish about seeing a continuous erosion of mutual fund flows. A sudden and sharp decline is far different than what we are seeing now. Eventually, for the market to be able to find its legs again and push forward, we will need to see people willing to pour billions and billions of dollars into new mutual fund purchases.

Options Sentiment
Neither the CBOE put call ratio or the ISEE call put sentiment ratio are significantly different from last week’s sentiment overview.

The CBOE Volatility index measures the implied volatility of S&P 500 Index (SPX) options. But something interesting has happened in the past few days, the volatility of the VIX itself is off the charts.

On Friday (Jan 16th 2009) it fell almost 10%, then on Tuesday it jumped almost 23% and today it fell again 18%:

According to Jason Goepfert of SentimenTrader.com, since the market top last October, every time that the CBOE volatility index (VIX) has gone up by 20% or more, the S&P 500 futures has tended to go up the next trading day:

DATE % CHANGE
• 10/19/07: +0.5%
• 11/01/07: +0.1%
• 11/07/07: -0.5%
• 06/06/08: +0.3%
• 09/15/08: +1.6%
• 09/29/08: +4.5%
• 10/15/08: +4.2%
• 10/22/08: +1.4%
• 12/01/08: +4.1%
• 01/21/09: +4.4%

The only exception was November 7th, 2008. The average gain was 2.05%.