Market Analysis (19 June’21)

Not all extreme optimistic sentiment readings lead to market tops, however, all market tops have recorded extreme optimistic sentiment readings. Let’s review several sentiment indicators to know our current sentiment landscape.

ETF Speculators

The Rydex family of mutual funds has a selection of funds that cover broad indices as well as narrower subgroups. These funds are popular with market timers, as some of them are highly leveraged (as much as two-to-one, so for example a 1% move in the S&P would correspond to a 2% move in the fund), and the Dynamic funds can be entered or exited intraday.

By far, the most popular funds are based on the S&P 500 and Nasdaq 100, which make up the vast bulk of index assets. This indicator shows the total amount of assets invested in the bullish funds based on those two indexes, divided by the total amount of assets invested in the bearish funds based on those two indexes.

The higher the ratio, the more bets that traders have on the indexes rising.

The Rydex Total Bull / Bear Ratio recorded the highest reading ever at the level of 35 several sessions ago! All of the prior extreme readings led to corrections / pullbacks (see chart below).

Futures Traders — Small Speculators

This index shows the net position of small (nonreportable) traders in S&P 500, Nasdaq 100 and DJIA index futures, full contract and e-mini, adjusted for position size and index value, shown in billions of dollars.

The small speculators — or the dumb money — have been shorting the 2020 rally that started in March 2020 very aggressively all the way until SPX made a new all time high in the second half of last year. After suffering heavy losses, the small futures speculators have finally figured out this market and went all in long during the last several weeks. In fact, they built the largest speculative long positions ever!

The Options Traders

The total put/call ratio is the volume of puts divided by the volume of calls traded on individual equities on the CBOE on a given day.  When there is a lopsided shift in volume, for example when there is heavy put buying and low call buying, the put/call ratio will be high. When an extreme is reached, this becomes a bullish contrarian indicator and we should expect higher market prices soon. Conversely, when options traders are optimistic and there is low put volume in relation to call volume, then the put/call ratio will be low and we may be near a market high.

The most recent 14d MA reading of the Equity Put/Call Ratio stands at 0.44. This reading is lower than the readings recorded at the prior major peaks in 2018 and 2020.

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