Tag Archives: sentiment

Long Euro

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I’m not a believer in manipulation, so I’m not counting on the central banks of the world to drive down the dollar. It’s as simple as 2% bulls: as of late last week there were 50 euro bulls for every bear. I always like to be the lone nut.

EUR.USD is looking very oversold at the moment by RSI, also. I’m still a long-term euro bear and would not be surprised by parity or $0.85, which actually looks all the more likely now that euroland is going to print away to relieve its banks of their bad bets on GIPSI bonds.

20-day equity put:call average at lowest level since at least 2003.

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Pej at realitylenses.blogspot.com dug up the raw data and put together this chart of the 20-day average:

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The running average of the equity put:call ratio is extremely predictive of near-term market moves. It is mean reverting, and deep dips like this indicate a high degree of bullish complacency among options traders.

Complacency still extreme

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Even if this is just a small correction in a continuing rally (which it is very dangerous to assume), the market has a lot of room left to shake things up. The 20-day average equity put call ratio is still at an extremely suppressed level:

Indexindicators.com

Here is the raw data since 2004, the last time we saw such a low running average of CPCE. Stocks went nowhere for about a year after that. They should be so lucky this time…

stockcharts.com

Such long-running lows must be balanced out with more than a bit of fear. One other thing that is noteable in this chart is how the Panic of ’08 only produced marginally higher put:call readings than the stagnation of ’04.

Gold set up for another rally?

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I can hardly believe it, but gold has failed to follow through on the decline from December’s $1228 high, despite the extreme and persistent bullishness leading up to that parabolic top. It’s held tight to $1100 and formed a contracting triangle, while DSI bullishness has dropped to the mid-teens. This is very similar to the set-up in sugar last fall before it blasted off from 0.22 to 0.30 and put in its final high (it trades now around 0.17):

Futures.tradingcharts.com

Here’s gold, also in a weekly chart:

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What’s interesting about this juncture is that stocks are extremely overbought on the kinds of readings that typically mark at least an intermediate-term top (put:call, sentiment surveys, waning momentum, etc). Since the dollar broke higher last December while stocks were unphased, we’ve seen somewhat of a breakdown of the old correlations (dollar and yen vs. everything else).

If the PM complex does levitate as stocks decline, it would resemble the action in early 2008. After panic and the deflation trade gathered some steam, the metals eventually succumbed. Here is the GDX mining stock ETF in blue vs. the S&P 500 in red:

Yahoo! Finance

Still 2007

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Yahoo! Finance

I can’t draw on this chart, but you can clearly see the similarities in price, RSI and MACD between the last 6 months and the period leading up to final top of the even bigger bear market rally of 2003-2007. Will we levitate up here for a year like we did back then? I doubt it, since this is a smaller degree wave and the time scale is more compressed. It appears to be running out of steam after 12 months, not 4 years.

Since summer, the bears have been demoralized by time, not price — we’re only 1000 pts higher than last August. The bullish complacency and dejected state of the bear camp is what you need for a final top.

RSI and put:call signals like we have right now are what you need for a smaller-degree top. One of these smaller degree tops will turn out to be the big top. This is not the time to give up on shorting.

Euro long as a contrary play

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Prophet.net

Note the upsloping daily RSI from very oversold conditions. Sentiment remains highly negative, so any upward movement would surprise the majority of traders and possibly result in a short-squeeze like Sept 08.

You don’t have to be very sure that the euro will rally — I’m not — to take this trade. The recent lows make such a clear and close stop position that the risk/reward balance is quite good.

Options sentiment update

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The 5-day average equity put:call ratio is now right at the mean:

Source: indexindicators.com

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You can see that the 20-day average still has a long ways to go, which means that the 5-day is likely to spike well over the mean in the next wave (a 3rd wave?) down. I’m looking for summer 2007 conditions to counter the extreme complacency that we’ve had since August, which suggests that we have another 5-10% on the downside in this move after any countertrend bounce from here exhausts.

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As far as that anticipated bounce goes, the VIX also threw its hat in the ring, offering a buy signal by closing back within two standard deviations of its 20-day average.

Source: stockcharts.com

Sugar high

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Traders are very bullish on sugar right now, so keep an eye out for a top. In Elliott Wave terms, this should be the fifth and final wave of the bull market. The 3rd wave, the most powerful advance in which most traders recognised this as a bull market, ended last summer. The contracting triangle sideways correction this fall was very likely a 4th wave, since this triangle is often the next to last pattern in a sequence.

As a commodity, sugar is prone to extended 5th waves with crazy spikes. Look at this post from last month with a sugar chart from the ’70s.

Anyway, here is today’s weekly bar chart:

Source: futures.tradingcharts.com

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Trader sentiment is a funny thing. People were crazy about sugar last summer at 24 cents, but by November four out of five didn’t want it at 22 cents, and now nine out of ten love it at 30 cents. Makes no sense unless you think of them as a bunch of herding animals.

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Party like it’s July ’07

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I have been watching the parallels between the last few months and the first half of 2007, and they are still very close. The late June – early July 2009 drop lines up with the late Feb – early March 2007 correction. In each instance, the markets then ramped up, then zig-zagged higher still as the put:call ratio oscillated at a low level. The final euphoric highs of July ’07 (when Chuck Prince said he was “still dancing” and Paulson said he had never seen such strength in the global economy) were marked by a brief lower low in CPC, which further compressed the springs for a stunning spike in fear as the equity markets cracked and Cramer threw a fit.

The crack here is likely to be even more violent, since everyone knows deep down just how bad things really are in the economy. It won’t take more than a shift in psychology to get people focused on the problems again, which are now fully developed, not just vague fears of some temporary “liquidity” issue in obscure debt instruments.

Source: indexindicators.com

The CPC does not linger at under 0.55.  Caution is creeping in already, as yesterday CPC made a higher print and the VIX, Russell and Nasdaq failed to confirm the Dow’s new high. The commodities complex may also be stalled out, and the dollar has corrected enough to continue far higher than in December. This time, the stars are aligned for an “all the same markets” rush to safety. Even Treasury bonds have sold off enough to rally nicely:

Source: Yahoo! Finance