The Game

Here is a sentiment update from Volar. Long read today, but it will be worth your time.

The reality is that today’s game is not easy; if it were, legends like Druckenmiller would not be throwing in the towel. The conundrum is the game has not changed since Livermore wrote the “bible.” Tullipmania (1630s) left the public with the crime of the dealers…. contracts were not made whole and the last one holding the hot potato was ruined. Human nature does not change. Top picking a bull market, hoping on news to move markets in favor of your bias, trading on “rationality”, and selling after a panic day are still bad ideas for the same reasons they were over 100 years (if not decades) ago.

Here is a bunch of JLL.

“The game taught me the game. And it didn’t spare the rod while teaching. Getting sore at the market doesn’t get you anywhere.

Disregarding the big swing and trying to jump in and out was fatal to me. Old Turkey was dead right…“Well, you know this is a bull market!” He really meant to tell them that the big money was not in the individual fluctuations but in the main movements-that is, not in reading the tape but in sizing up the entire market and its trend.

When a stock is going up no elaborate explanation is needed as to why it is going up. But if after a long steady rise a stock turns and gradually begins to go down, with only occasionally small rallies, it is obvious that the line of least resistance has changed from upward to downward. Such being the case why should anyone ask for explanations?

The game does not change and neither does human nature.” –JLL,1923

—————–On to charts—————

Breadth and Seasonality:

Custom_TRIN_2 (Like the Summation)

-My indicator is similar to the summation index (below)- not much has changed- still some room to run. They key is that we have yet to have divergence or we are not out of steam. Notice how the breakout is so exponential in the initial big move of a bull market, then the second break diverges, and finally one can start looking for divergence. Furthermore, notice what could happen if we broke trend…

Summation Index

-A breach of trend would fuel the fire- a lower low would be inspiring (same as my custom H/L TRIN). Notice the breakout similarities as my Custom_TRIN_2.

Adjusted TRIN

-Wow… not exactly bearish.

Positive Momentum Seasonality

-Short-term seasonality is quite favorable. There is certainly a bull case into the late summer, but the real bear case starts mid-July. Spring weakness is possible, but not guaranteed.

CBOE Mid-Bull market Call/Put Ratios

-Basically I selected similar years of momentum/sentiment and charted them here. Similar pattern to the last chart, but maybe will shed some light on potential summer weakness. I would not put *too much* faith in this, it is just supportive to the previous chart.

Sentiment

Naz COT

-Notice we had a huge fast change in positions as of late, but I would like to see divergence like late 2007 or the inverse of December 2008. I chose to use the NQ futures simply bc trader sentiment and/or speculative money flow seems to show up here, and it is the only one that seems to work 🙂

Short Interest

-Same concept as the COT. I am looking for divergence and/or short building on new highs. Obviously this is bearish longer-term.

Sentiment INDEX

-Same story- extreme- but as the next chart shows it would be nice to see the change in sentiment start to get extreme (aka this next chart). Obviously bearish longer-term.

Change in Sentiment INDEX

– Still room to run. In a bull market this can lead to early sells (I know from past experience). Nonetheless it shows that we do have some room.

CBOE 20/50

-Basically this is just another indicator that warns one from getting aggressively short in the shorter term. I admit this, like TRIN, is not the best sell-signal, but as long as it still says BTD, I would be hesitant in plunging short here.

ISEE Bollinger

– Basically we have no divergence even though call buying is getting extreme. I am not sure what value will initiate a sell signal. Many times this indicator is early when we make new highs, but odds are sentiment will start to diverge. This, like other indicators, is obviously longer-term bearish, but has no “signal” yet to say change of trend.

CBOE L-T C/P ratio (equity since 03)

– This shows a longer-term picture of call/put ratios. This would be the one indicator that has divergence, but it had divergence in 2003 and never really made a lower low until ’06/07. Neither the OCC equity (all exchanges) nor the ISEE has diverged yet. The trend is your friend here. Obviously long-term bearish like most indicators.

RUT new highs

-this basically goes to show what happens when small caps embed and make new highs…or lows. Or a bull market will generally look overbought- just like a bear market will look oversold.

BOTTOM LINE:

So in summary there is no reason to get emotional (ever). Extreme valuations and/or momentum is not the answer for shorts- a common fallacy IMO. Buy strength, sell weakness, regardless of rationality.  Look at the RUT chart (or silver for that matter); notice how long the market can be embedded in a 400 bollinger band in a bull market on the upside and the vice versa on the downside. Dennis and Eckhardt did not make money betting on convergence, but extreme deviation.

And of course another cliche quote, “But not even a world war can keep the stock market from being a bull market when conditions are bullish, or a bear market when conditions are bearish… it needs no explanation.” JLL

– I just might add… not even another freaking earthquake will stop a bull market from being a bull market, if the conditions are right. News will not change the trend of the tape, the emotion of the market must change. The tape rolled over before 87, 9/11, and LEH “events.”

Trade the tape in front of you- not the one your biased ego desires.

Cheers,

Volar