Current Stock Market Thoughts
A real-time look at Sentiment, Positioning Analysis, and Trend Analysis of the US Stock Market.
I have been meaning to write this post for a while now. Basically this is a follow up to: A Guide to Sentiment, Positioning Analysis, and Trend Analysis of the US Stock Market.
I meant to do this near the lows in August, as I viewed it at the time as a potential major inflection point. I know I am saying this in hindsight, but if you go in my Discord and go back to those days you will see that I was bullish when most were bearish. Not trying to brag, I have been wrong PLENTY of times. But, I get better every time I am wrong. As a result, I am wrong much less often than I used to be. As a trader or really anything in life, you should be constantly trying to improve. Incremental improvement every day/week/month. Make small tweaks to your method, only after thorough backtesting and forward testing. I am constantly doing that.
Anyways, I didn’t have time to write a post in August, even though I really wanted to. Blogging is not high on my priority list. If there is something I can do to improve my trading, I do that instead of blogging. But..blogging does in many ways help to improve my trading. So, from time to time I zone out and ramble on Medium.
Current Market Positioning and Sentiment
I’ll start with the overall view, TLDR. We are coming off a moderate to somewhat extreme inflection point in Sentiment and Positioning for the indexes, but not as large as recent extremes overall. In the short term, we are getting somewhat due for a mini correction, 30–50 points on ES ~1–1.7%. Not likely to have another large correction for a least another month or more, barring a large negative exogenous event or series of events. GEX exposure is high so a large move either direction is unlikely, Friday OPEX could change that. If GEX remains high, the targets for this uptrend are quite muted, if it gets cleared some, could see 3150–3250 before the next correction.
COT
In terms of COT, Hedgers got a little more long than they were at the highs. But overall they are still flat but holding up decent after this rally which is good overall for the bull case. Far from the same extreme seen in December, and lower than the June level.
VIX has been slammed. The Short Vol crowd(Of which, admittedly, I am apart of, but only through VXX Put buying. It is an easy way to participate in this high probability trade. Just don’t stay short too long and know the ins and outs of how to do it.) I had some short VIX exposure but closed it out. The next 2–3 day pop in the VIX, I will likely look to re-enter short.
VIX could be back at the 2019 lows at this rate pretty fast. Major change in the last two weeks. It is due for a 2–3 day pop, with the short term imbalances in sentiment, and the big risk event coming this week.
This hasn’t been updated yet this week(freecotdata.com), but Hedgers are still more exposed to the long side of VIX than normal.
Hedgers added some long exposure last week on VIX. It has a ways to go before it has the potential to be a huge red flag and a major show stopper for the current uptrend, but it is very important to monitor this. The short vol crowd is getting way too aggressive shorting vol at the tops in 2019. It has been a good signal.
TA
In terms of TA, there are a few things to note. We fell short of ATH’s by 3.75 points on ES. It is very typical for ES to break ATH’s by 10–20 points and then proceed to have a decent pullback, 30–50 points. I was anticipating that happening and did stay long expecting that to be a somewhat likely scenario. I did take partial at 3020 as that was my first profit target from my longs entered in the August correction. 3040 was my next profit target, but due to the somewhat extreme amount of call buying the last few days, and the overall not constructive at all action in order flow, especially on Friday, I did decide to exit my full position. I am leaning now towards a pullback into the FOMC rate decision on Wednesday. It is not a strong view, and my initial view of a break of ATH’s before the pullback still could happen. But I do lean towards the pullback has already started, primarily due to the things I mentioned.
Usually, the first pullback after a correction is roughly 30–50 points. I am just going to show the June correction and previous rally as an example:
Whether that correction has already started on whether we rally past ATH’s a bit and then have that correction, well that is the hard part of trading. I will be watching order flow closely for clues early in the week. If I see constructive action in order flow, I might attempt re-entry in the low 3k’s, but frankly R:R is not amazing and I am not too worried about missing 30–40 points of upside when I have captured the majority of this current uptrend so far. It is OK to miss some things from time to time.
If it plays out like June and we have already started the correction, then we could see 2970 early in the week, before FOMC. Overall it would be healthy for the uptrend if it does that. It would avoid rushing straight to excessive bullish sentiment. It also corresponds to the 38.2 retrace since the last decent pullback pivot, which is a fairly common retrace for early uptrends on ES:
If we decide to ramp through ATHs first, that would not be as constructive for the uptrend, and I might actually be interested in shorting depending on the makeup of…everything else mentioned here. That might look something like this:
Since people are always telling me I don’t keep it simple enough, too complex, analysis paralysis, etc. This one if for you guys. The weekly does look a bit extended to me:
Breadth
Big changes in breadth the last few weeks. Mostly positive medium term, potentially short term negative.
A few things I want you to note here. A really solid cluster of breath thrusts, outlined in blue. The 5-day and 10-day ratios are positive. However, this is short term slightly “overbought” breadth. These breadth thrusts are great signs for the medium term, potential negatives in the short term. The 20 stocks up 50% or more in a month outlined in red have been a very consistent short term top signal.
In terms of other breadth measurements, Percentage of stocks above their 50 day MA is a bit extended. Usually when you go from sub 30 to above 70 in a short amount of time that is a long term positive and possible but not guaranteed short term negative. Chris Ciovacco did a long video on that topic this week:
Short term OB on SPY Breadth, QQQ and IWM are very similar:
We are very much in NASI buy signal territory here, but short term OB:
CNN FnG
The last major extreme is certainly the bearish extreme. Not yet at a bullish extreme, but it is notable that we are already higher than the ES highs in late July. Adds to the short term pullback is “on the table” probabilities.
AAII and AIM Model
AAII is an overcited metric for stock sentiment. Not as accurate or scientific as others. But, Bulls remain pretty low on AAII:
AIM Model is superior. It is from Sentimentrader and combines many sentiment polls.
The picture is not as bullish here, but still, there is room for upside, which what I think is most likely for the intermediate-term.
SM/DM
Dumb Money rocketed into extreme bullishness on Friday:
It usually takes a month or more of extreme DM bullishness. Short term this is another negative. SM is still in a good place overall.
DIX+GEX
There were a number of high prints in the August correction. A nice cluster. Had a 46.9 print, the highest since early March. This is one of the best signals in any market. For those that use this, this rally was not a surprise, and there was a good chance those that follow this and trust it capitalized.
Recently, I am a bit surprised that the DIX has not dropped that much. Usually, after a big rally you start to see some offloading in the Darkpools. A month of heavy DIX selling is where you see tops form fairly consistently, especially if other things confirm. This tells me there is at least a month, probably more, of uptrend left. Bullish sign at the lows and continues to be a bullish sign here.
GEX has very quickly gotten very high. If this remains high, realized Vol will stay quite low. It is not a surprise at all that the market instantly went to low Realized Vol when this spiked hard recently:
If the GEX remains this high, the uptrend can continue, but very slowly. It would be better if it gets a flush with OPEX. That can and often does happen. Big Quad Witching OPEX on Friday.
Max Pain Levels Relative to SPY
I explained this in my post linked at the top. This is my “unique” way of looking at the Options market. A lot of people look at P/C ratios, Skew, IV, etc. I look at that as well, but I have found this method to be really solid. The current mean Max Pain level for the next 10 expirations, which extra weight given to Friday OPEX is 294 on SPY. This is versus a close of 301.09 on SPY Friday. A difference of 7.09 or nearly 71 points on ES. This is a very big negative for the short term. This is reflected in the recent P/C ratios. The 5 period OHLC4 MA is getting to a fairly low level:
Citi Panic Euphoria, Insider Ratio, Buybacks
Overall the above two should be fairly self-explanatory.
Been in a very long trend of stock buybacks outpacing new issues of stocks, which has been a big driver of returns the last several years. There is research out there that shows how much lower the S&P 500 would be without buybacks. This is notable and something to watch. A slight uptick is a worry, but overall less supply of stock equals less demand needed to push prices up.
Fund Manager Positioning
August survey…
Not sure I need to say much about this one…same for the following:
MOC Imbalances
Those that are in my Discord and pay attention, may have noticed I talked about a large sell imbalance in August. The bears were doing backflips over this. But, I said that this is very often seen near capitulation lows.
Now…Seeing a fairly large imbalance to the buy-side here.
2.2B to buy Friday, versus .636B to sell a .289 ratio. The 5 day average is .817, so decent amount more buying than selling in MOC. Not extreme, but does add to the close to a short term top narrative.
Weekly Catalysts Coming Up
Two major things this week. The Fed Rate decision on Wednesday. OPEX Friday. Some major economic releases for other countries, but nothing overly major for the US. https://www.fxstreet.com/economic-calendar
The Fed Rate cut has likely been priced in if anything it is possible the market has slightly overpriced it. The key will be the “FED speak” afterwards. With the market not majorly imbalanced in sentiment and positioning, I don’t expect a repeat of the debacle of the last FED rate decision. We were a bit extreme to the bullish side, which is a big factor that few talked about. The market would have needed much more dovish language to hold that level at that time.
OPEX is important because it is a Quad Witch, and it would be constructive if it can clear some of the GEX. One thing I want to mention about OPEX. The max pain pin for Friday is way down at 293. I don’t us getting down there with GEX this high, but watch the gaps in the OI, I usually see us settle somewhere in one of these gaps:
A lot of OI right at 300. Holding below there for Friday’s close is definitely an option. If we can’t hold below there, there will be an attempt to hold it below that 305 OI level for sure.
Russell 2000 and the rotation from Growth to Value
The move in RTY and the shift from Growth to Value is interesting. I am not sure what my take on it is, but I have been patiently waiting, and often early in looking for this RTY move. I tried it coming out of the June low, and it worked for a while then went sideways. I got out when it went sideways, would have better off keeping full ES exposure, but a win is a win. I was a bit late, but I did jump in Monday morning into RTY(out now). I still think this might have some more upside, but it is interesting to see what happens from here. RTY is a major Risk On Index. If it can maintain a bullish posture, would be overall a good sign for the uptrend on ES. The breadth divergence on RTY has led ES drops by a significant degree the last several tops. Watch if it starts to diverge again.
The Hedgers have been saying this was possible for a while:
The shift from Growth to Value, has happened before but usually been short lived. Chris Ciovaccio did a blog post on it this week, Sentimentrader has talked about it some as well. Will be an interesting thing to watch.
Rather than trying to reformat this for this blog post, I am just going to literally copy and paste a post I made in the “Superstocks Finders” google group this week:
SuperStocks Finders Post about the shift Growth to Value
Yeah, the shift into value was interesting yesterday. Growth stocks have been leading for a very long time.
https://www.longtermtrends.net/growth-stocks-vs-value-stocks/
Value stocks have been underperforming for a long time. Value stocks have had long periods of outperformance in the past, but for the majority of the last 10 years growth has outperformed. A lot of the growth in the indexes has been due to P/E expansion. It’s interesting because there are a lot of undervalued companies out there, and also a lot of severely overvalued companies.
The indexes have a ton of overvalued companies. If you look at the CAPE ratio(Shiller PE):
https://www.multpl.com/shiller-pe
We are very high on that compared to historical norms. A lot of that is due to passive investing, and the fact that is in a bit of a bubble. This is an interesting article I linked the other day and one I agree with: https://www.bloomberg.com/news/articles/2019-09-04/michael-burry-explains-why-index-funds-are-like-subprime-cdos
It is possible fund managers might start to rotate into value, to lessen the blow IF we go into Recession in the next few years. Many Fund Managers are required to maintain very high levels of Equity exposure, and very minimal cash levels. Value gets hit in a bear market as well, but less so. So it is a way to hedge risk to some extent. If growth P/E’s come down before an economic slowdown, that would be a huge positive. It is something interesting to watch. The Russell rallying is a very good sign for the market, but it would be good if it can actually sustain it this time. I did take some Russell exposure this week. We’ll see how that goes.
It takes more than one day to make a new trend, so I am not yet convinced that the market is going to start favoring value. But definitely something to keep an eye on.
As for the market as a whole, as you noted, we had a lot of bearish sentiment and positioning in this correction. Risk-Off assets went crazy with positioning and will likely cool off for a while now. Some of that money will go back into stocks and we should see new ATHs in my view. But, long term I do think we continue to see a lot of chop and a lot of corrections compared to past markets. The Yield Curve does matter, but the context matters. There is not a slowdown in employment yet. Past Yield Curve inversions had a slowdown in the economic data that accompanied that. I think we have at least another year left before those issues become a problem. Mid Summer 2020 roughly.
There is also a multitude of possible outcomes for a market. Right now, you can make comparisons to 2015–2016. There was a lot of Recession talk, the economic data slowed a bit, earnings slowed a bit. The slowdown has been bigger this time and now the Yield Curves are inverted, which is a major difference from 2015–2016. I don’t suspect we have a repeat of 2017, but it absolutely is possible, one of many possibilities that exist. My best guess is we see a slow grind higher, a lot of chop and a lot of corrections. Sentiment and Positioning will continue to work incredibly well for picking medium-term inflection points in that environment. I think the Recession talk is overblown and early. But, I will say this. Just because a lot of people are talking about it, it does not mean it can’t happen…it just usually doesn’t happen when many are talking about it. It may happen, but SPX might be 3400+ before it starts, and likely fewer people will be talking about it. The key is to watch the unemployment and other data. Urban Carmel, Troy Bombardia, Macro Charts that you linked above, Sentiment Trader, and Chris Ciovaccio all post weekly/monthly blogs and videos. If you read through their recent content, there is a reason to be concerned, but a Recession is not necessarily imminent at the moment.
https://youtu.be/wvwnlYv6krA?t=284
This video, at the timestamp he talks about how usually you see unemployment rise well before the Recession. No uptick in unemployment. High Yield spreads are not confirming the Yield Curve. Many things in Macro are not confirming the Yield Curve inversion.Many here take a bottom-up approach. For small caps, I do not worry too much about the market as a whole, because a really strong SuperStock tends to ignore the market for the most part. But, I trade more than just small caps, and for the other things I trade(mostly ES-S&P 500 Futures), I take a top-down approach. Neither style, IMO, is better than the other necessarily. But I obviously do prefer top-down.
Anyways I rambled a bit here. In my Discord, I go into detail on these things sometimes.
You can apply for SuperStocks Finders here.
VIX Term Structure
Very healthy term structure. Big headwind for VXX. The December dip has been interesting and has been there for months(you can see the historical term structure on that website.
Order Flow
I exited my longs accumulated during the depths of the August correction on Friday before I was planning to. Two reasons. One, there are many more potential exogenous events that could cause a gap down because of the Tweeter-in-Chief. I have been going flat for the weekends much more often. Normally with this large of a cushion on a trade, I would not worry too much about it because weekend gaps used to be quite rare. I would either get a cheap hedge or just ride it out depending on where we were in the trend/correction cycle. Now, they can and do happen more frequently, so I am exiting more often. Overall, there are more gap ups than gap downs on ES, so in the long run, you come out ahead by staying long through the weekend. But, after a huge run, was not a bad idea to get flat.
The second reason I exited, was the order flow. Friday even though it was only a mildly down day, saw a ton of sell side icebergs and a huge imbalance in sell orders on the December contracts. Overall delta was POSITIVE on ES, but the order book was not constructive at all. The SPY level II was showing a similar large imbalance in the book. Overall, I do value executed orders more, and the executed order story was not constructive either. A lot of delta is currently sitting above 3010 on ES. If it can push back through that level, it is fine, if we sink below 3K sell stops start to come out pretty fast. It could be a quick trip to that 2970 level.
The things circled are the things to note. Overall the Friday Delta was positive, but the Icebergs were very frequent and the book had a heavy sell-side presence. The “Bid and Ask Depth Bars” at the bottom are the Total Book. Positive numbers are more Asks than Bids. A number very close to 2 is very high, and I see this at inflection points often. This is December contract, September contract told a different story:
Here negative Delta and a buyer imbalance in the Order Book. The Delta during the Rollover is always troubling to use, and it can be hard to extract meaning. I was watching the December contract more, and overall I do think that huge imbalance in the book in that as well as SPY(Usually was running about 2:1 Ask to Bid Ratio most of Friday on the Level II.
The September contract Delta trapped above is not too bad, but December it is significant:
Look to the bars on the left side, Delta at Price to see what I am talking about.
This is just another view:
Daily Delta at Price and TPO Bars. A lot of Delta at the highs. December contract.
Long Term Order Flow
Overall ES CVD broke out of a downtrend for the entire month of August and is strongly positive. A negative divergence and a lot of Delta expended without further upside movement would be a big red flag. Not seeing that yet.
SPY CVD is in an overall uptrend long term, since the early August dump:
The “Strong Trends” Market
There has been a tendency for markets to not give pullbacks. I am talking all markets really, this is a phenomenon I have observed more and more. Markets don’t often give a ton of time to get on, they just go straight to the destination now.
There are a lot of pullback traders. I focus mostly on pullbacks, as do many. Sentimentrader talked about that this a few weeks ago. My RTY entry this week was most definitely not a pullback trade, it was a breakout/continuation trade. I do not take many breakout trades, but with the overall context, it was a fairly easy decision for me to make. In reality, I was just shifting from long exposure from ES to RTY.
Easiest money has been made
The easiest money has been made, while most are saying we are still not “all clear”. I am not going to call out anyone directly here, that is definitely not my style, but there are some Social Media heroes with over 100K followers that are saying these sort of things at the moment. They will start to get bullish eventually. In my opinion, the time to be aggressive has already come and passed.
From here it does get harder, but in the high GEX environments, it actually is not that hard IMO. I like to use Linear Regression, Fib Extensions if pushing ATHs, Fibs if not pushing ATHs, Keltner Channels, Order Flow, and of course short term sentiment and positioning to trade short term extremes. For shorts, I take smaller sizes and quicker profit objectives, until the point we get to a longer-term Sentiment and Positioning extreme, then I at a minimum exit all longs. I strongly start to consider longer-term, larger size shorts as well at that time. Most of the Twitter heroes will be posting “bullish chart setups” at that time.
Chop is likely to continue
My view is that we are likely to continue to have a lot of chop. I do think we can push higher before we do move towards a late-cycle peak. But in my best estimation, I think this current chop will be the norm until then. This is typical of late cycles, and the current Yield curve set up:
It could certainly be negated by a dramatic shift in the Yields. It would probably take a lot of things happening to do that. A really good trade deal, improving economic data versus the mild deterioration we currently have, buybacks picking up, IPOs picking up, EPS picking up. It is possible, but we are very close to basically the “point of no return” in my view. Recessions are unfortunately built into the system, and probably unavoidable.
Recession, Yield Curve, Economic Data
I was intending to write more about this, but this will have to wait for a different time. This post has taken me a massive amount of time. Maybe next time. But for now, just know that I feel we are late-cycle but have some more room for growth in both ES and the Economy. ES usually tops before the economic data does, but my view is that is still roughly mid-2020 or so. Rough estimate. Will change as the data comes in. My views fairly closely match Troy Bombardia, who is now a part of Sentimentrader:
Here is our discretionary market outlook:
Long term: risk:reward is not bullish. In a most optimistic scenario, the bull market probably has 1 year left.
Medium term (next 6–9 months): most market studies lean bullish.
Short term (next 1–3 months) market studies are mixed.
In my Discord, I expand upon my Macro views from time to time:
You can follow me on Twitter if so inclined:
Hopefully, this helps put some context to my large post on Sentiment, Positioning, and Trend Analysis of the US Stock Market. I might do this at major inflection points in the future, but I would not count on it. It took a lot of work to get this post done, 5 hours by my count. As I said in the beginning, blogging is not high on my priority list. I do all this for free, and always will, but as a result, it is not a guarantee I will always be able to produce a post like this at key times. Hopefully, it helps answer some of the questions people have had about my previous posts.
Good luck out there, manage risk. See you in the next post.
