I remember a few years ago I was having an animated conversation with legendary sentiment analyst Phil Erlanger at a similar juncture in the market, when sentiment was reaching bullish extremes. (If you're not a subscriber, Phil's advisory service is an absolute must-read, and in my opinion a tremendous bargain.)
Phil said something really great that day that I've never forgotten. He said: "Before every great trade -- where you are really moving contrary to the crowd -- there comes a point when people think you're crazy."
Right now I think we're at this point. Even I find myself wondering if I'm crazy, and maybe this time really is different.
The answer is an emphatic no, of course. But Phil's point is spot-on. It always feels "different this time" while it's happening.
The fact is sentiment is now approaching historic levels of bullishness and complacency. Indeed, the two volatility measurements on the Nasdaq 100 have both just reached the lowest levels in their history.
This is weird and dangerous movement for these volatility measurements, to say the least. The last time these implied volatilities were this low -- showing a complete lack of fear among traders -- the Nasdaq 100 lost nearly half its value in just a few months. The QQQ dropped from $39 to $22.
The VIX hasn't struck rock bottom just yet like these other two, but momentum-wise it's hitting relative extremes. This current short-term advance phase is as attenuated and stretched as any I've seen. Look at the 60 minute chart of the VIX:
Now let's see how price has responded during this tremendous erosion of fear out of market participants.
I'm very interested to see how the next short-term decline phase is going to play out. It's way overdue, and often stretched out advance phases lead to stretched out decline phases. We'll know a lot about the true health of this market over the next few weeks, after we see how the short-term decline phase plays out.
We always look at the market as constantly oscillating between short-term advance phases and decline phases, as measured by the momentum of sentiment. An advance phase for the markets happens when the VIX is dropping, and a decline phase when the VIX is rising. However, it gets confusing -- because sometimes prices will fail to advance during an advance phase; meaning, the bulls are not getting the job done when they have the offense on the field.
We are seeing a prime, text-book example of this right now, as we've had one of the longest and most drawn out advance phases in sentiment in a long, long time -- with the VIX plunging -- yet prices have failed to make any significant headway to the upside.
At this point we're just looking for evidence of fear to show up among market participants. This will be the cue to act. Let me show you what this has looked like in the past, under similar circumstances.
One thing I've noticed is that 3-day weekends tend to usher in major changes in trend. It's just an anecdotal observation, but more often than not traders come back from a long weekend looking at things from a fresh perspective, and a new willingness to change their positions.
So it wouldn't surprise me at all to see this uptrend run on fumes for another day or so, and then the overdue decline phase start promptly next week.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: The tank drained a fractional 0.4% on Tuesday to remain essentially unchanged at 18% full of negative sentiment. With the stock indices up less than 1% and the earnings binge upon us the lack of movement is not surprising.
It would not be surprising if going into Thursday's Expiration Day the tank were to hit its low (which would correlate to an exhausted advance phase), but, of course, only time will tell.
SHORT-TERM: The hourly gauge remains in a mature uptrend.
MID-TERM: The mid-term gauge progressed by 1 point to 93% in its advance phase. The Confidence Diffusion Index (CDI) clicked up to 3 (out of 7).
LONG-TERM: Due to a glitch in a data download the weekly gauge gave an incorrect number on Tuesday morning. I reported it at 56%. In fact it should have been a 15 point move to 69%. The data error has since been corrected, but I just wanted to set the record straight. This sort of thing happens occasionally in any data download. Functionally this made no difference as we got the same buy signal and the same CDI reading on Monday as we would have without the glitch. So, using the corrected data the weekly gauge was unchanged at 69% on Tuesday. Our weekly CDI clicked up to 4 out of 7.
BOTTOM LINE: If historical precedent means much, then this market will need to stop to refuel sooner than later. The tank and mid-term gauge are approaching levels where historically they tend to reverse, taking the market down.
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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