The Twitter poll I ran yesterday indicates that the market participants’ views on the S&P500’s next move are split with a slight skew towards a more bullish outlook. If bulls are correct, the S&P500 will finally break out above the long-term diagonal resistance line and reach $4000. However, if bears are correct, we will most likely enter into a new bear market with a potential retest of the March lows.
Who is correct then? Let’s review some of the sentiment data at hand.
Equity Put/Call Ratio
The Equity Put/Call Ratio has moved into excessive optimism territory in June and stayed there ever since. Nevertheless, the market continued to move higher and staged a break out into the new all time highs. Still, I would argue that the equity option traders’ current positioning is more bearish than bullish for the market.
As I pointed out on my public Twitter account yesterday, retail traders piled into the Inverse ETFs on Thursday and Friday like never before: as a result, the inverse ETF volume reached the highest reading ever. During the last several years, most of the big spikes in the Inverse ETF volume led to higher prices, however, there were 2 exceptions: 1) October 2018 and 2) March 2020.
Futures Markets: Hedgers
The chart below shows the combined dollar value of hedger positions in S&P500, Nasdaq 100, and Dow Industrials futures contracts. As you can see, the hedgers as a group started to accumulate long positions in the futures markets in March 2020. They haven’t started to sell into the rally just yet expecting higher prices in the future.
Dark Pools Index
According to the Dark Pools index, the institutional funds went all in S&P500 in April – June. Their sentiment started to shift in July and they have been mostly net sellers in August. As the market sold off on Thursday and Friday, the Dark Pools Index continued to drop as well.
Small Option Traders: Call Buying
Last week, the smallest of traders increased their bets on stocks. In a month they have gambled nearly $40 billion on stocks. This level of gambling is unprecedented!
Depending on what data you consider, you might get to a completely different conclusion. If you look at the Dark Pools index or the Small Option Traders call buying, the risks of a substantial correction or even a new bear market are above average. However, if you look at the Hedgers positioning in the futures markets as well as the Inverse ETF volumes, the new bull market that started in March 2020 is not over.
My tactical bias is always driven by my Market Model. The model went SHORT on Thursday and remained SHORT as of Friday’s close. As long as it is SHORT, I will continue shorting QQQ (that’s what I’ve been doing on Thursday and Friday). However, once it flips LONG, I will be happy to trade on the long side for as long as the market wants to go higher.
The Nasdaq, S&P500 and even NYSE’s AD Lines all made new all time highs during the recent rallies. It tells me that this market should continue moving higher and the ultimate top is not in (all prior tops were formed on bearish divergences with the AD Lines — this condition hasn’t been met this time around).
Even Longer-Term Views
One day this market will peak. Valuations will matter again. This will be THE LIFETIME opportunity to SHORT and PROFIT!