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Weekly Sentiment Update: The Bears Are Disappearing!
Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. Neither side ever provides real evidence of their views. But let’s look at the actual numbers to see how the crowd actually feels. Last week, traders were undeniably bearish. Specifically, they were loading up on put options like there was no tomorrow, which provided a ton of upside fuel after Macron scored a victory in the first round of the French Presidential election. So let’s see if sentiment has lifted with this week’s surge, which drove the Russell 2000 and Nasdaq to fresh all-time highs. (click here for a primer on the 5 sentiment indicators listed below) 1) VIX Spread – Bullish The VIX has dropped like a rock this week, and the 3-month spread is at 3.27. This means traders are moderately bullish. 2) CNN Fear & Greed Index – Neutral The Fear & Greed Index is now at 48, up from just 34 last week. F&G operates on a 1-100 scale, and a reading of 48 is smack in the middle, meaning traders are neutral. 3) AAII Sentiment – Neutral The latest AAII Sentiment Survey shows that 38% of individual investors are bullish, a huge jump from last week’s 25.7% reading. While this is a major jump, it’s right in-line with the long-term average of 38.5%. So it’s neutral. 4) CBOE Equity Put-Call – Neutral The CBOE Equity-Put Call ratio was at 0.63 yesterday with a 3-day moving average of 0.62. This indicates that traders are neutral. This is a pretty big decline from late last week, when traders were scooping up puts like there was no tomorrow. 5) ISE Sentiment – Neutral The ISE Sentiment Index is at 92 (92 calls bought for every 100 puts). The 10 day moving average is just 88.4. So the recent trend shows higher put option demand. However, I’ll actually call this neutral because the ISE Sentiment index has been so down for so long that I’ll count these readings as neutral. One thing to keep in mind: for the past few months, I’ve found that the ISE Sentiment Index hasn’t been terribly helpful in terms of judging sentiment. I believe its measurement methodology is very well thought-out, but even so, the results haven’t been all that helpful. I wrote more about that topic here. So I’m taking the time to consider swapping it out with another indicator. Conclusion Out of 5 sentiment indicators, we have: 1 bullish 0 bearish 4 neutral This is a big change from last week, when we had 0 bullish, 4 bearish, and 1 neutral. So we went from stretched markets with bearish sentiment, to even more stretched markets with neutral sentiment. Now, the big question is whether sentiment’s about to go full-on bullish. We’ll know more tomorrow. After the close today, we’re getting an avalanche of earnings from the likes of Google (GOOGL), Amazon (AMZN), Starbucks (SBUX), and Intel (INTC), all of which are major Nasdaq components. Incidentally, those reports should also dictate whether SPX is about to vault over the prior 2400.98 all-time high set on March 1. And don’t forget, #1 index heavyweight Apple (AAPL) reports on Tuesday, and it too will play a key role in the near-term action. So keep an eye out — if we get stronger equity market action in the next few days, sentiment could head to full-on froth!
Continue Reading -->French Fried Bears: They’re What’s for Dinner!
The market is certainly pleased with the first round of the French Presidential Election. Emmanuel Macron scored a victory and is apparently in the driver’s seat to win the May 7 runoff against far-right populist Marine Le Pen. Le Pen supports a vote for a French exit of the election, and assuming Macron wins, a so-called “Frexit” may be off the table. I wouldn’t count Le Pen completely out just yet though. We’re still living in an era with the Brexit, President Trump, and Italy’s ‘No Vote.’ So anything is possible. Today, the SPX is up 1% and within striking range of the 2401 all-time high. XLF is up 2.4%. The euro is up 1.3% against the dollar. The French CAC 40 index is up 3.9%. And the VIX is down a whopping -23%. So why is this happening? Why are we making such a big move? It’s simple: the bears built a big, big fire. And then they fell in it. Last Thursday afternoon, I pointed out that trader sentiment was looking very bearish heading into the weekend election. As you probably now, the permabears have been out in force saying that everyone’s complacent. But the numbers showed otherwise. For example, the American Association of Individual Investors showed that just 25.7% of individual investors are bullish. That’s well below the long-term average of 38.5%. And as of Friday’s close, the 10-day moving average of the CBOE Equity Put-Call Ratio was 0.703, indicating that traders had been stocking up on puts ahead of the weekend. The last time it was that high was February 8, 2017, when SPX closed at 2294.67. The index then hit 2400.98 on March 1. And then, there’s the ISE Sentiment Index, which measures call options demand relative to put option demand using only opening long customer transactions. (market maker and firm trades are excluded) Its daily average has been just 84 this year, or 84 calls bought for every 100 puts. That’s well below long-term average readings. So there was certainly no shortage of bears heading into the weekend. (h/t to Marc Eckelberry for pointing this stat out on the Virtual Trading Floor® (VTF). And when you get a lot of bears bracing for a negative outcome — like a Le Pen victory — that means there’s ample fuel for a rally if the news is positive, or even neutral. The Lesson to Be Learned High stock prices and valuations do not necessarily equate to bullish sentiment. At its root, a bull market happens when there are consistently more optimists (buyers) than (pessimists) sellers. But even with us within 2% of all-time highs, the data shows that there’s still an awful lot of folks that are braced for downside. It doesn’t seem to make a whole lot of sense… but when is anything involved with the market perfectly logical?
Continue Reading -->Weekly Sentiment Update: The Bears Are Still Raging!
Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. But let’s look at the actual numbers to see how the crowd actually feels. Last week, traders were definitely feeling bearish. We had an inverted VIX curve, big put option demand, and significant negativity among individual investors. Now that the S&P 500 is slamming up towards last week’s highs, let’s take a fresh look at the numbers. 1) VIX Spread – Bearish The VIX is dropping, and the 3-month spread is at +1.0. This shows that traders are moderately bearish. Related: read our primers on VIX basics and VIX curves. 2) CNN Fear & Greed Index – Bearish The Fear & Greed Index is at 34, up slightly from 28 last week. F&G operates on a 1-100 scale, and a reading of 34 means traders are moderately bearish. 3) AAII Sentiment – Bearish The latest AAII Sentiment Survey shows that 25.7% of individual investors are bullish, down from 29% last week. This is well below the long-term average of 38.5%. 4) CBOE Equity Put-Call – Neutral The CBOE Equity-Put Call ratio was at 0.70 yesterday with a 3-day moving average is 0.64. This is indicates that traders are basically neutral. I expect this number to shrink by today’s close. 5) ISE Sentiment – Neutral The ISE Sentiment Index is at 92 (92 calls bought for every 100 puts). The 10 day moving average is just 84.4. So the recent trend shows higher put option demand. However, I’ll actually call this neutral because the ISE Sentiment index has been so down for so long, that today’s 92 reading actually counts as pretty neutral activity. Please note: I am strongly considering dumping ISE Sentiment from this weekly update simply because it’s almost always reading bearish no matter what happens in the market. I may replace it with the CBOE Skew Index, which measures how much traders are paying for protection against tail risk. Conclusion Out of 5 sentiment indicators, we have: 0 bullish 3 bearish 2 neutral We’re not seeing much change from last week’s sentiment report. So my market thesis is unchanged too — I think we could be stuck in a range for a while, though I’ll add I see a better chance of a breakout to new all-time highs than a sharp decline. The current action is reminiscent of last summer, when we consistently had mixed-to-bearish sentiment and stock prices that looked stretched. The result was a seemingly endless sideways grind, because bearish sentiment and high valuations are a good recipe of a whole lotta nothing. The bear case remains the same — what goes up must come down. So the question is whether market volatility has been low enough for a long enough time for a trend change to actually occur. When that changes, I don’t know. But the fact that traders are so bearish implies that the snoozefest could go on for quite a while.
Continue Reading -->TETF: A Cosmo Kramer Approach to ETF Investing?
In recent years, investors have been plowing mountains of dough into passive index ETF’s. Why? Because actively-managed mutual funds and hedge funds have 2 major disadvantages: 1) Poor performance 2) Higher expenses So when the ETF Industry Exposure & Financial Services ETF (TETF) launched today, I couldn’t help but take a close look at this new ETF. This new fund follows the Toroso ETF Industry Index, which provides exposure to publicly-traded companies in the ETF industry. My initial thought was that it sounds like Cosmo Kramer’s coffee table book about coffee tables: But Kramer’s book overdelivered on its promise — not only is the book about coffee tables, but the book itself is a coffee table. Meanwhile, TETF is a plain-vanilla bank/brokerage industry ETF using a hot keyword for marketing purposes. Here is a breakdown of the fund holdings from the press release: Tier 1, 50% of the Index’s exposure, is made up of companies with substantial participation in the ETF industry, providing direct financial impact to shareholders, including BlackRock, Charles Schwab, Invesco, State Street, WisdomTree, and more. Tier 2, 25% of the index’s exposure, is made up of companies with substantial participation in the ETF industry, providing indirect financial impact to shareholders, including KCG Holdings, NASDAQ, Intercontinental Exchange, Inc., and more. Tier 3, 15% of the Index’s exposure, is made up of those companies with moderate levels of participation in industry, including Bank of New York Mellon, US Bancorp, FactSet, Ameriprise Financial, and more. Tier 4, approximately 10% of the Index’s exposure, includes companies that are new or participating in a smaller way in the ETF industry relative to their overall focus, and includes such names as Morningstar, Eaton Vance, Goldman Sachs, Legg Mason, Citigroup, and more. The problem is there are very few pure ETF companies, aside from WisdomTree (WETF). According to BlackRock’s (BLK) most recent quarterly earnings report, just 37% of its assets are ETF’s. And many of these companies, like State Street (STT) and Invesco (IVZ) have plenty of exposure to actively managed mutual funds — the very market the ETF business is supposed to be killing. So I can’t see a reason to consider TETF over something like XLF. XLF has a much lower expense ratio (0.14% vs. 0.64% for TETF), plus it’s more liquid, it’s optionable, and it has a long trading history. And odds are they’re going to have pretty similar performance over the long run anyway. This is why it’s important to take a deep look at trendy ETF’s — odds are there’s already something on the market that does the same job at a lower price with better liquidity. On a related topic, within the next 2 years, expect to see plenty of mediacal marijuana/canabis, virtual reality, and biohacking funds that are ordinary ETF’s covered in the buzzword of the day.
Continue Reading -->Weekly Sentiment Update: Bears Are Everywhere and They’re Killing Volatility!
Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. But let’s look at the actual numbers to see how the crowd actually feels. In last week’s sentiment update, the data indicated that traders had gone bearish even before the US missile attack on Syria and the nonfarmpayrolls miss. Yesterday, we clearly saw even more bears coming out of their caves. So let’s take a complete look at where we stand ahead of the long holiday weekend. 1) VIX Spread – Bearish The VIX is near a 6-month high and the 3-month curve has inverted. Typically, we see this after the market gets wrecked — not when the SPX is less than 3% off all-time highs. This is definitely bearish. 2) CNN Fear & Greed Index – Bearish The Fear & Greed Index is at 28, down from 43 last week. F&G operates on a 1-100 scale, and a reading of 28 means traders are most definitely fearful. 3) AAII Sentiment – Bearish The latest AAII Sentiment Survey shows that 29% of individual investors are bullish, up slightly from last week’s 28.3% reading. This is well below the long-term average of 38.5%. 4) CBOE Equity Put-Call – Bearish The CBOE Equity-Put Call ratio was at 0.69 yesterday with a 3-day moving average is 0.70. This is indicates that traders are bearish. 5) ISE Sentiment – Neutral The ISE Sentiment Index is at 139 (139 calls bought for every 100). The 10 day moving average is just 87. So the recent trend shows higher put option demand. However, I’ll actually call this neutral because the ISE Sentiment index has been so down for so long, that today’s 139 reading counts as pretty bullish activity. Please note: I am strongly considering dumping ISE Sentiment from this weekly update simply because it’s almost always reading bearish no matter what happens in the market. I may replace it with the CBOE Skew Index, which measures how much traders are paying for protection against tail risk. Conclusion Out of 5 sentiment indicators, we have: 0 bullish 4 bearish 1 neutral This is reminiscent of last summer, when we consistently had mixed-to-bearish sentiment and stock prices that looked stretched. The result was a seemingly endless sideways grind, because bearish sentiment and high valuations are a good recipe of a whole lotta nothing. The bear case certainty seems the same — what goes up must come down. So the question is whether market volatility has been low enough for a long enough time for a trend change to actually occur. Here a chart of the S&P 500 along with realized volatility from last July. I marked the Snooze Periods so you can see just how long the present on has persisted: As you can see, it’s been trending down since October — that’s a pretty long stretch considering how much news we’ve gotten. When the trend changes, I don’t know. We’ve had catalyst after catalyst and the market’s shrugged it all off. There’s been the Fed, a lot of economic data and news, a heavy flow of political news, and an explosion in geopolitical tensions. But the fact that traders are so bearish implies that the snoozefest could go on for quite a while.
Continue Reading -->Do you Love the Smell of Fear in the Morning?
Napalm, son. Nothing else in the world smells like that. I love the smell of napalm in the morning. -Lieutenant Colonel Bill Kilgore, Apocalypse Now It looks like traders are starting to worry about serious downside. Yesterday, I pointed out that safety assets were showing big gains amid rising geopolitical tensions. Today, the VIX jumped over 16 for the first time since November 10, 2016. And the VIX is stil trading as a massive premium to actual market volatility. And one of my favorite sentiment indicators — the CBOE Equity Put/Call ratio — skyrocketed to 0.79 yesterday. This is well above the YTD average of 0.65. As you can see in the chart below, we’ve seen 4 spikes to similar levels in the past 5 months. And all of those spikes occurred near interim lows in the S&P 500. Traders can rarely use sentiment indicators as buy/sell signals. They tend to only be useful at extremes. For the CBOE Equity Put/Call, a 0.79 is an outlier, but not a major league freakout. Nonetheless, this latest reading implies that traders are rapidly pricing a lot of fear into the market. When I complete my next Weekly Sentiment Update tomorrow, we should see even more bearishness than last week. The big question now becomes: is a lot of fear enough fear to form a bottom?
Continue Reading -->Weekly Sentiment Update: The Bears Were on Patrol, Even Before Syria and the Weak Jobs Report
Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. But let’s look at the actual numbers to see how the crowd actually feels. With the US missile attack on Syria and the NFP report miss, now is the perfect time for a sentiment update. Last week, the bears were out in force as we digested near all-time highs. But with the bulls still holding steady, let’s see if anything’s changed. 1) VIX Spread – Neutral The VIX spiked a bit post-Syria, but interestingly enough, it’s now DOWN on the day — even after the NFP miss. That has the 3-month VIX spread is at +2.16 which indicates that traders are starting to grow skittish. Readings around +2 are neutral. 2) CNN Fear & Greed Index – Bearish The Fear & Greed Index is at 43, up slightly from 34 last week. F&G operates on a 1-100 scale, and a reading of 43 means traders are moderately fearful. 3) AAII Sentiment – Bearish The latest AAII Sentiment Survey shows that 28.3% of individual investors are bullish, down from 30.2% last week. This is well below the long-term average of 38.5%. 4) CBOE Equity Put-Call – Bearish The CBOE Equity-Put Call ratio was at 0.66 yesterday with a 3-day moving average is 0.63. This is indicates that traders are slightly bearish. 5) ISE Sentiment – Neutral The ISE Sentiment Index is at 108 (108 calls bought for every 100). The 10 day moving average is just 90. This indicates that demand for put options continues to outstrip that for calls. However, I’ll actually call this neutral because the ISE Sentiment index has been so down for so long that 90 is actually high relative to recent history. Please note: I am strongly considering dumping ISE Sentiment from this weekly update simply because it’s almost always reading bearish no matter what happens in the market. I may replace it with the CBOE Skew Index, which measures how much traders are paying for protection against tail risk. Conclusion Out of 5 sentiment indicators, we have: 0 bullish 3 bearish 2 neutral This shows even more bearishness than last week. Note that the all of these indicators except for the VIX spread, were released BEFORE the attack on Syria and the nonfarm payrolls miss. So it’s not like the market was necessarily braced for good news, even though traders were optimistic about NFP because of the recent ADP and jobless claims beats. It is indeed possible that the next readings of the 4 others may grow more bearish in the near future. And interestingly enough, the SPX just slipped into the green, thoguh small caps and banks are underperforming. It should be an interesting day, to say the least…
Continue Reading -->Weekly Sentiment Update: The Bears Are Growling, But No One’s Listening
Permabulls always say everyone’s bearish. And permabears always say everyone’s bullish. But let’s look at the actual numbers to see how the crowd actually feels. Last week, bears started sneaking out of their caves just in time for Spring. And with the bulls continuing to hold steady in the face of doubt, let’s see if anything’s changed. 1) VIX Spread – Bullish The VIX spiked to 15 early Monday, but it’s back down under 12. That has the 3-month VIX spread is at +2.69 which indicates that traders are moderately bullish. 2) CNN Fear & Greed Index – Bearish The Fear & Greed Index is at 34, up slightly from 30 last week. F&G operates on a 1-100 scale, and a reading of 34 means traders are bearish. 3) AAII Sentiment – Bearish The latest AAII Sentiment Survey shows that 30.2% of individual investors are bullish, down from 35.3% last week. This is well below the long-term average of 38.5%. 4) CBOE Equity Put-Call – Bearish The CBOE Equity-Put Call ratio was at 0.64 yesterday with a 3-day moving average is 0.67. This is indicates that traders are slightly bearish. 5) ISE Sentiment – Bearish The ISE Sentiment Index is at 83 (83 calls bought for every 100). The 10 day moving average is just 90. This indicates that demand for put options continues to outstrip that for calls. However, I am strongly considering dumping ISE Sentiment from this weekly update simply because it’s almost always reading bearish no matter what happens in the market. I may replace it with the CBOE Skew Index, which measures how much traders are paying for protection against tail risk. Conclusion Out of 5 sentiment indicators, we have: 1 bullish 4 bearish 0 neutral This shows even more bearishness than last week. So while the bears are pushing an age-old theme — everyone’s complacent — I’m getting the feeling that traders are waiting for another shoe to drop, even though we’ve seen improvement in the action below the surface. Yesterday, the Nasdaq and Russell showed relative strength, and on Tuesday, we saw great upward action in the banks. So while some of the so-called “Trump Trade” has unwound itself, the bears’ growing isn’t adding up to much. But there’s an important question to ask here: how can sentiment be bearish if the SPX is 2% from all-time highs? We’ve seen this over and over throughout the bull market — markets hovering near record highs, but sentiment reading negative. My guess is that there’s inherent distrust in the market, and traders are eager to turn bearish on even small declines. And those that are buying often appear to be doing so reluctantly. It’s more of a “I might as well buy” attitude than “I’m buying because we’re going straight to SPX 3000.” And that’s a big difference from the last two bull markets.
Continue Reading -->Weekly Sentiment Update: The Bears Are Done Hibernating… and They’re Hungry
Permbulls always say everyone’s bearish. And permabears always say everyone’s bullish. But let’s look at the actual numbers to see how the crowd actually feels. Last week, sentiment went neutral for the second straight week. The big news this week is today’s healthcare vote (well, let’s hope we get it over with it), so let’s see if traders 1) VIX Spread – Bullish The 3-month VIX spread is at +2.6 which indicates that traders are moderately bullish. However, this number has been sliding steadily as traders slowly price in more volatility. 2) CNN Fear & Greed Index – Bearish The Fear & Greed Index is at 30, down from 53 last week. F&G operates on a 1-100 scale, and a reading of 30 means traders are bearish. 3) AAII Sentiment – Bearish The latest AAII Sentiment Survey shows that 35.3% of individual investors are bullish, which is just below the long-term average of 38.5%. It’s close enough to the middle to cal 4) CBOE Equity Put-Call – Bearish The CBOE Equity-Put Call ratio was at 0.67 yesterday with a 3-day moving average is 0.73. This is indicates that traders are bearish. 5) ISE Sentiment – Neutral The ISE Sentiment Index is at 101 (101 calls bought for every 100). So there are a ton of post-Fed call buyers. , which is a bullish reading. The 10 day moving average is just 89.7, up from 83 last week.This indicates strong demand for put options, but the ISE has been extraordinarly low forever, and 89.7 is pretty high compared to recent readings. Conclusion Out of 5 sentiment indicators, we have: 1 bullish 3 bearish 1 neutral So in the past 4 weeks we’ve gone from 2 weeks of bullishness to 2 weeks of neutrality. Markets have been in a slow motion grind lower since the spike high on Trump’s speech, and the sluggishness is impacting traders’ moods.
Continue Reading -->Snap’s Earnings Date Is an Awfully Valuable Piece of Insider Info…
UPDATE: Snap finally announced May 10 as its earnings date. Click here for more info. Snap Inc. (SNAP) (a.k.a. Snapchat) options have been trading for about a week, so let’s take a deep dive to see what the story is. First things first: Snap options are fairly liquid. The spreads on most contracts are pretty reasonable. As with all new issues (especially volatile high-beta tech names), the options are expensive, with implied volatility readings in the 47% – 60% range, depending upon the strikes/expiration. It looks like traders expect earnings to be reported the week of May 19. We know this because that week’s series has the highest implied volatility readings. So do you know what is an EXTREMELY valuable piece of insider info? Snap’s exact first earnings date. Why? Because for the options expiring on the week of earning, implied volatility (and thus option prices) will skyrocket. I’d be shocked if they didn’t go over 100% for the week of earnings. For example, the $20 calls expiring May 19 are going for about $1.95, with implied volatility of 60%. Let’s imagine a hypothetical scenario where Snap says today that earnings would be announced on May 18. If implied volatility went up to 100% from 60%, all things being equal, the price of that $20 call would go up to $3.18! (Number calculated with CBOE’s options pricing calculator. Please note: this only holds true for today, since options prices are heavily impacted by time to expiration and other factors) So keep your eyes peeled for the announcement — there could be money to be made if you are very, very fast. (as in able to place orders in seconds) One thing that really surprises me is that there isn’t an especially large put skew in Snap options. A large put skew means the put options are very expensive compared to the calls. Typically, hot new issues that are heavily shorted (which describes Snap to a T) have very high put skews. This is because when stock is hard to borrow (common with heavily-shorted stocks), demand for puts goes way up because traders are desperate to get in. Now, there is a put skew in Snap options, but it’s just a few percentage points here and there — not nearly as big as what we’ve seen with stocks like TWLO, FIT, and GPRO.
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