There's an old cliché that says from 1929 to 1930, the amateurs lost their money in the markets; the smart money lost their money in 1931; and the very smart money lost theirs in 1932.
The point is that bear markets eventually find a way to beat every single strategy.
What could explain the market's endless rise right now? Obviously there is now money coming in "off the sidelines" to fuel an excessive demand for stocks. Determining whether that excessive demand for stocks will be proven correct is clearly not the market's current business. Right now the current goal is to squeeze out every last remaining bear.
One thing that I think is happening is the traders that have been right about the markets over the past few years, and making money, are sticking with their strategies. (Me included, I guess.) The "hot money" has been buying puts and betting against this historically overbought market. Yet when prices refuse to buckle under, this hot money has to take their lumps on shorts and puts, driving the market up further as they capitulate and buy back positions.
In this chart from SentimenTrader (available on our web site for subscribers), we can see how the normally astute traders on the OEX -- the S&P 100 -- have been betting against this rally in a big way. This is a crowd that history tells us not to "fade" very often.
The Editor of SentimenTrader, Jason Goepfert, puts it this way: "The OEX put/call open interest ratio should be considered in a non-contrarian manner. As put open interest rises in relation to call open interest, it suggests that OEX option traders - usually quite successful at identifying market turning points - are accumulating put positions. This is a bearish development. Conversely, if OEX traders are accumulating call positions, then the put/call open interest ratio should fall, which is normally a bullish development."
We can see how this group of traders has a great track record at picking tops and bottoms. As a group, they've been making money throughout this bear market. (As a side note, it's unlikely traders are selling OEX options, as these are American-style options that can be exercised prior to expiration; options sellers vastly prefer to sell European-style options, like the XEO or the SPX, that cannot be exercised prior to expiration).
This put/call open interest ratio is stretched way, way beyond the norm. These traders are loaded to the gills with puts. They have seen the low VIX (the VIX is computed from the OEX) and the overstretched rally, and they are loading up on puts -- not because they have to, which would drive up the VIX with the strong demand, but because they want to.
Yet the market keeps blowing these put positions out. The bulls are now so relaxed, after such a massive uptrend, that they are in no hurry to do anything. They've got a big profit cushion to sit on. The bears, on the other hand, keep getting blown out. And then they re-load shorts at a higher level, and then they get blown out again. It's the "smart" money's turn to get worked over right now. It's 1932 all over again. Another reason this may have extended so long is the smart money has lots of profits to work with, from 2 years of "easy-pickings" during the bear market for technically-oriented, experienced traders.
At some point, this cycle will break. It will take some bad news and a desire to quickly take profits on the part of the bulls. Or the weight of profitable positions will simply be too much for the market to carry. This is how V-bottoms usually form without a visible catalyst -- the value of puts and short positions becomes so great that traders have to start taking profits. Now the calls are carrying the value, and people may want to book profits ahead of expiration next week.
We may also see the "smart" money give up on puts, and start to buy calls. The market likely needs such a capitulation yet again. We saw this last Friday, and there was some evidence of this happening into the close yesterday too.
We may get another such capitulation on a gap up this morning. Today, I'm on the lookout for a double top at Friday's highs, and a pullback that sells off straight through into options expiration next Friday. This market is pushing out of bounds on the upside again, just like last Friday, which usually signifies that long positions are carrying too much value for traders to resist taking profits. So it's likely we'll see how the market survives in this rarified air a second time around.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: Remained unchanged at 2% full of negative sentiment on Wednesday.
SHORT-TERM: The hourly gauge sustained its Advance phase status.
MID-TERM: Turned up into an advance phase from its now-expired decline phase, rising 3 points to 31%. Our Confidence Diffusion Index (CDI) advanced 2 points to bullish 2 (out of 7).
LONG-TERM: The weekly gauge remained unchanged at a peak 96/4 level. The weekly CDI flipped two points into the green to a bullish 2.
BOTTOM LINE: Both the VIX and the Put/Call Ratio are showing NO MOMENTUM, The VIX has been caught in a narrow range since late April and the 20-dma of the Put/Call Ratio has been flat since late March.
The gauges measure the momentum of sentiment. If there's no momentum to be measured in the tank then the gauges mainly just measure time passing. So we want to focus on the level of the tank. And so far the market's ability to continue on upward, advancing aggressively while running on fumes is just plain impressively bullish.
The market will very likely remain in a bullish phase until the tank takes enough negative sentiment to fill it up over about the 13% level.
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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