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Volatility Hits a 55-Year Low: Is a Trump Slide Coming?
On Monday, I provided an in-depth analysis of the post-election collapse in volatility, just as the VIX was hitting levels not seen since February 2007. In that piece, I focused on day-to-day volatility of the S&P 500. Now, I’m going to take a look at intraday volatility. I used a very simple but effective formula to make my judgements. I took the day’s range (the high minus the low) and divided it by the prior day’s close Since 1950, the S&P has had an average intraday range of 1.2%. Since 2000, the average intraday range has been 1.4%. In 2016, that number was 1.0%… up until the election. And after the election, it dropped to just 0.6%. So just as day-to-day volatility dropped, intraday volatility has dropped just as much. Now here’s where things get really interesting… We’ve had 125 trading days since the election, with an average intraday range of 0.584% — half the long-term 1.2% average. (as of 1:00 p.m. ET) The last time we’ve had a 125-day stretch with so little intraday movement was March 19, 1962! If you’re falling asleep… you have good reason. And oh yeah — the S&P had a rough time after March 19, 1962. It closed at 70.85 that day, and fell to 52.83 on June 27. The market’s dip in 1962 was deemed “The Kennedy Slide.” Heck, there was even a Flash Crash on May 28, 1962, with the Dow falling 5.7%. Could we see a similar Trump slide? I guess it’s possible, mostly because it’s not uncommon for a bear market to be proceeded by a low volatility stretch. To balance that, I’ll issue my usual caveat: a sample size of 1 means absolutely NOTHING, and I do this kind of research mostly for entertainment purposes. And to be even more clear: I’m not rushing to get short the market in anticipation of a big drop. But for fun, let’s look at some historic parallels. The JFK Library said this about President Kennedy: John Fitzgerald Kennedy captured the Democratic nomination despite his youth, a seeming lack of experience in foreign affairs, and his Catholic faith. And in 2016, Donald Trump completely smashed the Republican establishment despite having zero political experience. Sheer charisma played a big role in each man’s victory. And in both elections, the market rallied after the result. What about geopolitical tensions? Kennedy had the Bay of Pigs Invasion in 1961 followed by the Cuban Missile Crisis in 1962. In 2017, we’ve got Russia, Syria, ISIS, etc. That’s quite a few coincidences to content with…
Continue Reading -->The Rise of Donald Trump and the Collapse of Volatility, by the Numbers
With the VIX hitting 9.69 today — a level not seen since February 2007 — I wanted to get an idea of just how slow the market is moving. To do so, I analyzed daily S&P 500 price data going back to 1950. Since November 9, 2016, the first trading day after President Trump’s victory, the S&P has moved an average of 0.3%* per day. (*percentages expressed in this article represent the daily percentage change expressed on an absolute basis. So if the market moves -1% on Monday and +1% on Tuesday, the average move is 1%) But going back to 1950, the daily average move is 0.7%! And here’s another funny stat. The average daily move in 2016 BEFORE Trump’s victory was 0.6% — pretty close to that long-term 0.7% average. So my 6th grade math proves that volatility collapsed after the election, even though we’ve had no shortage of market-moving news, between the Fed, French elections, Syria, North Korea, Trump/legislation, etc. Now let’s look at 1% daily moves. We’ve had 122 trading days since the election. And the S&P has moved 1% or more exactly 5 times. That’s 1 out of every 24.4 days. In 2016, before the election, the S&P was moving 1% once every 4.7 days. Long term, the S&P had 1% moves every 4.9 days. So we used to have a big move once a week. Now we’re getting them once a month… if we’re lucky. But what’s really interesting is that we also saw an extended period of low volatility prior to the last bull market peak on October 11, 2007 — though it wasn’t as quiet as this one. From January 1, 2007 to October 11, 2007, the market moved an average of 0.5% per day. 2006, a remarkably sedate year, also had an average daily move of 0.5%. So are we seeing parallels between 2007 and 2017? Maybe. Just remember this: if you’re drawing parallels between 2007 and 2017, you’re talking about a sample size of exactly 1. That’s not exactly scientific. So who’s to blame for the lack of volatility? ETF’s? Runaway algos and high frequency trading programs? Trump himself? Newly confident CEO’s that love slamming the buyback button? The Alphabet Soup Gang? (the Fed, ECB, BoJ, BoE, etc.) All of them? If you have the answer, let me know when I wake up…
Continue Reading -->Weekly Sentiment Update: Why the Bears May Fuel New All-Time Highs
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, the overall mood of traders shifted to neutral from the prior week’s extreme bearishness. With the healthcare vote, earnings from AAPL/AMZN/FB/TSLA, and the April nonfarm payrolls report out of the way, let’s see how traders are feeling ahead of this weekend’s French election. (click here for a primer on these 5 sentiment indicators) 1) VIX Spread: Bullish The VIX dropped under 10 this morning, and the 3-month spread is at +3.98. This means that traders are fairly bullish. 2) CNN Fear & Greed Index: Neutral The Fear & Greed Index is at 45, down from 48 last week. F&G operates on a 1-100 scale, and a reading of 45 means traders are neutral. 3) AAII Sentiment: Neutral The latest AAII Sentiment Survey shows that 38.1% of individual investors are bullish,basically unchanged from last week. This is right in-line with the long-term average of 38.5%. 4) CBOE Equity Put-Call: Bearish The CBOE Equity-Put Call ratio was at 0.77 yesterday with a 3-day moving average of 0.69. This indicates that traders are bearish. 5) ISE Sentiment: Bearish The ISE Sentiment Index is at 65 as of the Thursday close (65 calls bought for every 100 puts). The 10 day moving average is just 88.2. So the recent trend shows higher put option demand. The big drop ahead of Friday’s NFP report has me slotting this number in at bearish. Conclusion Out of 5 sentiment indicators, we have: 1 bullish 2 neutral 2 bearish So traders have gotten more negative since last week, when we had 1 bullish, 4 neutral, and 0 bearish sentiment indicators. Last week, I wondered whether sentiment was about to go full-on bullish, but we saw precisely the opposite occur. Traders actually got more bearish, which is vert encouraging for the bulls. Judging by yesterday’s surge in put option demand (as indicated by the CBOE equity put-call ratio and the ISE Sentiment Index), traders were hedging aggressively for today’s NFP report and this weekend’s French election. This means there’s a lot of bearish bets that will need to be unwound in a jiffy if we get a Macron victory in France. I don’t think Marine Le Pen can be counted out until the final vote is tallied, but it certainly looks like Macron is in the driver’s seat. Call me crazy, but I think SPX makes new all-time highs above 2401 by Monday at 9:45 a.m. ET. (not that 8 points is a meaningful move in the grand scheme of things…)
Continue Reading -->Our 10 Top Articles of April 2017
With April 2017 coming to a close, let’s take a quick look back to our 10 most popular articles of the month, as judged by our internal website statistics. We’ve got everything from education on the VIX to technical analysis tips to Scott Redler’s latest appearance on CNBC’s Fast Money. Enjoy them! 10) What is the VIX? And How Can I Trade It? – April 20 Learn the basics of the VIX, and how you can trade instruments based on the VIX. 9) How the 3-Bar Rule Can Help You Deal with Failed Setups – April 10 Learn to avoid setups that look like they are triggering, but actually fail. 8) Oh Snap! A Unique Options Opportunity Presents Itself – April 18 Snap options looked unusually priced ahead of the May earnings report, presenting an opportunity to place an interesting options trade. 7) Jeff Cooper: Gold $1262 Is the Level to Watch – April 10 Jeff Cooper breaks down the levels you need to be watching in gold. 6) 9 Tips for Picking the Right Stocks for Swing Trading – April 4 As a swing trader, one of the most important decisions you’ll every make is choosing which stocks to trade in the first place. 5) How to Use the VIX Curve to Judge the Market’s Mood – April 17 The VIX isn’t very useful as a market indicator. But looking at the curve can tell you a lot about the market’s mood. 4) 7 Interviews with 7 Top Traders – April 1 Get to know 7 of our top traders, including Sami Abusaad, Kurt Capra, and Mark Harila in this exclusive interview series. 3) Jeff Cooper: Why a Big League Market Reversal Could Happen – April 6 Technical analysis maestro Jeff Cooper identifies market levels that could signal a major change in trend. 2) 17 Killer Tips Every Momentum Trader Should Know – April 3 Most successful traders are highly disciplined. So to help you get better momentum trading results, we’ve put together a list of 17 handy rules that will keep you out of trouble. 1) Scott Redler: 4 Charts You Need to See – April 10 Scott Redler laid out his case for the banks on CNBC’s Fast Money. Here are the 4 charts he used to break down the action.
Continue Reading -->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 -->