For the umpteenth time, the S&P 500 has again failed to clear the critical 1060 level. Perhaps, just perhaps, there is a pattern emerging here. At least all my annoying harping on this area as the pivotal zone has been vindicated by the market's action.
Once again the S&P 500 could only live for a few brief minutes in the rarified air above 1060. There are simply not enough shorts around to provide sustained buying pressure above this widely recognized -- and therefore important -- resistance level. When longs come into the marketplace to take profits, price immediately hits an air pocket and careens back down under 1060.
Going into the late afternoon on Friday, the market entered a short-term decline phase, as measured by implied volatility. When I say "decline phase" in this context, it doesn't necessarily mean that the market is going to go down -- it means that the market has shifted into a state where the path of least resistance is down, with the pendulum of sentiment shifting back to rising fear.
When the VIX and VXO start climbing, and their momentum is up, then that equates to a decline phase for the markets. Lately the short-term advance phases have been outpacing the declines -- that's how you build a mid-term uptrend, after all -- so we'll need to see now if this current decline phase shows a change of character on that score. Such a significant short-term decline will be an important clue about a possible mid-term decline, lasting weeks to months -- which is the type of trend we're looking to capture with Rydex positions. So it's still too early to jump to conclusions on that.
But this week is shaping up as a potential shake-out. The wild card is this is an expiration week for options, and despite popular wisdom this tends to squash trending moves in the market.
Now I want to highlight a nifty piece of sentiment analysis by Jason Goepfert, Editor of sentimenTrader (available to subscribers), who is really on to something with his ROBO put/call measurement. ROBO stands for "retail-only buy-to-open", and I personally think this solves one of the major problems with using the put/call ratio for sentiment analysis.
Most of the time, we don't know what strategy is being executed in the options market, just from raw transaction data. But this ROBO measurement is a very pure sentiment reading on how the smallest traders are placing their bets. And what it is saying now is potentially very important. So I'm just going to quote directly from Jason's weekend commentary:
OPTION WORRIES, by Jason Goepfert, sentimenTrader
Bottom Line: The smallest of option traders are all-out bullish.
I discuss the ROBO put/call ratioTM frequently, because I think it's an important look into the real-money activities of those we know, for a fact, are small traders. Recall that this indicator looks at the purchasing of puts in opening transactions of 10 option contracts or less compared to the purchasing of calls in opening transactions, also for 10 contracts or less. This data removes the biggest arguments against traditional put/call ratios (such as from the CBOE) in that with those ratios we don't know the size or strategy behind the numbers. Here we know both.
The average size of the trades making up the ROBO ratio were generally between $175 and $2100 this week, so we know we're talking about the smallest of traders here. Also, we narrow the subset down to option purchases to open only, and we know the strategy behind the trades -- these traders buy calls to speculate on rising equity prices, and they purchase puts to speculate on falling prices. There are few, if any, complex option or equity replacement strategies here.
The ROBO p/c ratio for last week came in at 0.33, which is by far the lowest ratio seen at any time since December 2000. Since the week ended 10/17 through this past Friday, a time when the S&P has gained a whole 11 points (but lost a maximum of 21 points and gained a maximum of 24 points in between), these traders have purchased a total of 3.9 million calls, but bought a total of only 1.5 million puts. Again, these are opening transactions only, so it's safe to assume that we're talking about a great emphasis on upside speculation versus downside protection in a flat market.
I've said before that the selling of calls against existing stock positions is a popular strategy for these traders, as they agree to cap the potential gains on their stocks in return for a little extra cash on the side, just in case their stocks decline or hold steady. In fact, this was the predominant strategy that these guys employed throughout the bear market. For the past three years, it has been rare to see a week go buy where call buying accounted for a greater percentage of the volume than call selling. Only twice has that happened for two weeks in a row -- until now. Since early October, call buying has outpaced call selling for five out of six weeks. Bullish options strategies (call buying and put selling) has outpaced bearish strategies (call selling and put buying) all six weeks, and has now reached a point where bullish strategies account for almost 60% of total volume. Once again, that is a pace unseen since the bubble days.
These traders have undergone a shift in psychology -- from one of conservatism in protecting their existing stock positions, to one of outright speculation on more gains in the stock market. It is clear that the smallest of options traders, those that lore says are the most likely to lose their money, believe the bull market is back and here to stay. Scary.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: Filled 1.5 points to 5% full of negative sentiment.
SHORT-TERM: Rolled over into a decline phase
MID-TERM: Progressed 3 points to 18% on the decline side with Confidence finally joining the gauge on the decline (red) side of ZERO. When the gauge passes 20% that's a confirmed sell signal.
LONG-TERM: Progressed 3 points last week to 9% on the decline side with Confidence regressing to a bullish 1. While we don't yet have a weekly sell signal we may be approaching one.
BOTTOM LINE: We still don't have a real spark of fear but the way this market is developing we are certainly ripe for one. The market's head is half way through the window of opportunity that leads to a decline phase. But it hasn't stuck its neck out to make a commitment yet.
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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