Posts

It’s Time For A Pullback In Stocks

After a 72% move higher in the SP500 a lot of bears are saying that the market has gone far enough and that we are due for a new crash that will take us back to and in some cases past the lows of 2008.  While a crash is possible and probably justified we are instead looking for something along the lines of a modest pullback to maybe a 10% correction.

One of our favorite sentiment indicators is that of put/call ratios.  We use the 5-day equity only put call ratio to warn of high risk areas and to point our low risk areas.  As you can see in the chart below we are currently at a reading of .51 which is not only below out “high risk” threshold but is also the lowest reading in over a year.  While the signal could be wrong it is hard to argue that options traders are not overly one sided right now.

5-Day Equity Put/Call Ratio and SP500

sp500-5-day-equity-put-call-ratio

In case you want to see more bearish sentiment look no further than the 10-day total put/call ratio.  Anything below .75 is typically considered very bearish and right now we have a reading of .68 which is the lowest reading in two years.  Needless to say this indicator is also showing that option traders are too bullish.

10-Day Total Put/Call Ratio and SP500

sp500-10-day-total-put-call-ratio

One price based indicator that we use at The Macro Trader fairly extensively is what we call a reversion to the mean chart.  Basically it takes a long term reading of the market, normalizes it, and then gives an overbought/oversold reading.  We then plot one and two standard deviation lines above and below the mean.  As you an see in the chart below we are about 1.5 standard deviations above the mean which is significantly higher than we saw for most of the 2002-2007 bull market suggesting that things are a bit overdone.

SP500 RTM Chart

sp500-reversion-to-the-mean-chart

Add to all of this a TD Sequential sell signal a few day ago and how near we are to a 50% retracement of the crash and things look less like a buying opportunity and more like a selling/shorting opportunity.  Again we are not calling for a new low, just a pullback/correction.

Happy Trading,

Dave@TheMacroTrader.com

Disclaimer-The Macro Trader is short the SPY-Sp500 ETF

II Survey Shows Overheated Sentiment

While extremely bullish sentiment does not always call tops it has never, at least to our knowledge, ever called a bottom either. Looking at the chart below of the Investors Intelligence Bull Bear Ratio along with its 13-week (3-month) moving average you can see that not only has sentiment risen as fast as the market but it is at highs not seen since 2004. While this is not necessarily a sign of a market crash like some would lead you to believe we do think that the current situation warrants caution. We are currently not selling off our long positions but we are holding off from most long opportunities right now. (Click on chart twice to enlarge)

Investors Intelligence Bull Bear Ratio

investors-intelligence-bull-bear-ratio

Happy Trading,

Dave@TheMacroTrader.com

A Simple SP500 Timing Model

We track hundreds of different economic, fundamental, technical, sentiment, and cycle indicators. Some are stand alone and only help us discern particular situations while others are full blown timing models that we use to get in and out of the market. Some are very complex with ten and even twenty inputs ranging from jobless claims, to put call ratios, to nickel, to the advance decline line. Essentially anything that we test that helps to give us an edge we use to some degree or other. As global macro traders we of course have several models for every market that we trade, as well as models that only point us to markets showing abnormal movement.

As of a few days ago we had one of our longer term SP500 timing models trigger a buy signal. This timing model is very simple and only uses the NYSE Advance Decline line and the SP500 closing price. This models esge is not huge but it is solid and historically you are risking about 1:1 meaning that the historical return is almost the same as the worst historical drawdown.

In our newsletter and in our own trading we rarely use a model as an automatic buy or sell signal but we do use them to tell us which dorection to trade. Right now this extremely simple model is showing that the advance delcine line has finally been able to have a sustained run and break above its long term trend, in this case the 150-day moving average. Again we don’t, and don’t recommend, trading directly off of these signals as almost every model we track can be improved upon by selecting better entry and exit points but they do helo us tremendously in our trading.

SP500-NYSE Advance Decline Line

sp500-advance-decline-model-4

As you can guess we are becoming increasingly bullish after being bearish for the better part of two years. Who knows if this rally will continue as there are a ton, and maybe a trillion tons, of harsh economic realities and hardships, but for now the trend is up and we are starting to lean to the long side.

Happy Trading,

Dave@TheMacroTrader.com

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XLY Consumer Discretionary ETF

Today’s post is short but as they say a picture is worth a thousand words, and sometimes even more. In our subscriber area we have a detailed analysis of the consumer and consumer related stocks. For everyone else, here is the chart of the consumer discretionary ETF and you are welcome to draw your own conclusions.

XLY-Consumer Discretionary ETF

xly

Happy Trading,

Dave@TheMacroTrader.com

P.S.

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If you are getting value out of our posts, you can do us a favor by linking to us with your site or blog and mentioning The Macro Trader to any of your friends that trade.

Bear Markets and Bear Market Rallies

CNBC has 50 guests a day coming out and saying that this is “THE” bottom, Kass comes out and calls it a “Generational Bottom”, and investors that are flat or short are wondering if they are missing the boat.

In times like these it helps to put things into perspective. One of the ways we do this is to compare our current situation with similar times in history. As you will see in the following charts there is a good chance that you aren’t missing much at all.

This chart is of the current situation.  We have marked each move of 20% or more.  As you can see we have already had three rallies that were up 20% or more in a matter of weeks, or even days. If you had bought the top of the first 20% rally hoping to not “miss out” you would be down over 20%.

SPY-SP500 ETF

20

As you can guess this is not the first time that this has happened. Every extended bear market in history has had multiple 20% moves that have only sucked in the desperate traders only to burn them with a long fast fall back to new low. If you look at this chart of the 2000-2002 bear market we had four rallies of 20% or more before finally bottoming out and starting the 2002-2007 bull market.

SPY-SP500 2000-2002

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Going back farther here is the 1962-82 bear market.  Here we are using the Dow and the 20%+ swings are shown in the bottom pane where a reading of 1 means that there was a rally of 20% or more and a reading of -1 means that it fell by at least 20%.

Dow 1962-72

62-82

And finally we have the Great Depression.  Looking at the lower pane we can see that there were several different 20% or greater swings.

Dow Jones 1928-1940

20-depression

The market loves to fake us out.  Bear markets are always more volatile than bull markets and this one is no different.  While this could be THE BOTTOM we tend to think that it is A BOTTOM and we are currently short.

So you may be asking what would need to happen for us to change our minds?  The simple answer is higher highs and higher lows, also known as an uptrend.  Other bullish signs would be economic indicators that actually improved instead of worsened, improved and sustained breadth, and some actual leadership.  By the way, banks will not be the new leaders.

Happy Trading,

The Macro Trader

Dave@TheMacroTrader.com

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