Sheep-Pigs

This is “Volar,” Mole is letting me contribute here a couple times a month on sentiment. Tis an honor.

First, this is a great site because it is UNBIASED and it is dedicated to making $$$- not building ego. Ego and bias are different, but both useless in life and trading. This is the only blog/site that seems to respect the tape- even if the tape is propped up and irrational. I, like Mole and CS, am interesting in banking coin, not arguing with what the tape or trying to predict its movement.

On to trading.

Markets come in a variety of forms and have different personalities. Some markets have bulls, some pigs. If one does not know what one is engaged with, then one will not know how a market should act under a set of conditions. Equities are in a bull market- period.

Lets talk sentiment.

In a bull market, sentiment trends, but in wave 5 it diverges. So it is apparent that equities are in a wave 3- the longest and most unpredictable motive wave. Here is raw sentiment (30% means 30% above normal).

Notice that the absolute level matters, but the bollingers matter more, because markets trend. This is a bull market, and odds are equitis dont stay here long- even though it looks “high.” Many, including myself at times, were expecting a sell-off in December due to the extremities in sentiment; however, in wave 3 one should expect that things get more extreme.

Now lets look at the change in that sentiment index.

Ok so you get my point. Equities can make a lower low, but odds are bulls step in here like late 2007. If you want to be short here- fine- but I will place my cards in more optimal places.

Now sentiment polls are one thing to watch, but money movement is another. So lets look at the CBOE equity Put/Call ratio. This is a seasonal chart of equity Calls/Puts.

Since JAN call buying tanked, and put volume picked up, yet equities did not fall- they had a chance. Data has only been more extreme 2000, but notice that seasonality matters more. 2000 was nuts, but it still had seasonality take it into the top in APR. Likewise, notice how Santa gets his gift each year.

Ok now lets look at Puts/Calls over time. This chart is adjusted for volume and uses a rolling average.

When a sell-off is priced in- it shows up here. Or if you want to be an equity bear- thinKTWice. Caveat Venditor. This data clearly warns the bear to maybe hibernate and pick a better fight. Captain obvious generally does not win. Dont get me wrong the bull’s time is coming, but that is when bears throw in the towel, not when the bulls get less bullish. Wave 3 dumb money jumps in; wave 5 the bears throw in the towel.

NOW BACK TO SHEEP PIGS

So sometimes, sheep get lucky or the Bernank does it for them. Moreover, there are times when the lucky sheep start to get greedy and come to the same watering hole over and over and they forget to keep an eye out for predators. I admit, I personally thought 2008 was the end of commodities, but some things dont die when Ben opens the floodgates.

Here is a quantifiable dataset of crowd theory. This data is the breakdown of total open interest- or this is the total speculators long everything against the US$- those Short the US$ (NET). This is the CFTC COT (commitment of traders) data. I love excel and I downloaded all the FX futures and summed them up and subtracted the DX.

Guess what? Your grandma is record short the US$ and record long OIL. No personal bias here- just data.Crowd theory is not new (MacKay 1841). Notice that the greenback was moving 200pips a day along time ago and not much ever showed up in the COT. The market was full of money moving for fundamental reasons, not grandmothers loading up on Euros in ETFs sold by Sell-Side pundits and Wall Street touts.

If a NET 480K cars worth 100K each cannot push the futures below trend, I am practically considering investing in the greenback. This past week the BOYZ tried this daily at 8:30 EST. Tis worth noting that volume is not open interest (OI). OR 50% of all current contracts outstanding are NET short the US$. Not 50% of volume traded. Things will be volatile.

Bottom Line: Rarely does one get to see this nonsense in this magnitude, but my hats are off to Ben and Timmy for creating this rationality. Nevertheless, as a trader, one must stay unbiased and focus on the tape. Mole has many tools that take bias out of the market- use them.

Given this data, it appears the best case for an equity bear is an LT top formation similar to 2007. I am not saying it could not get ugly here, but if it does, it will take more time to squeeze the bears out to form that top. Equities dont top with bears piling on like flies on fecal matter. Finally, data suggests that it will be difficult for the US$ to collapse on broken trend, if everybody is already short…

Remember to listen to the tape, do not listen to news or bias; bank coin.

Cheers,

-Volar