The Long & Short Of It

There is a bull and bear case. I presume bulls ought to BTD, but so far, they are not. What I mean is that when a market does not rally on conditions in which it should (and no for heavens sake I am not talking about “oversold” conditions I am talking sentiment), something has changed.  A few weeks ago I remember saying, something along the lines of “why is there no call buying on this high… why is short interest not falling?” Those questions are not for your benefit, they are questions I ask myself at each and ever new high – for a reason. I need to know if the bull market is acting like a bull market.

Or over the last 3 weeks, I have discussed many long-term sell signals (divergences amok). Today I list the bull and bear case. As for my trading, I am only scalping and using an algo or two. I will discuss my thoughts on swing trading below.

As usual I have many charts…. nothing is ever simple. This post is to simply put a perspective on the market (pun not intended). One must trade the tape before them, not the tape they desire. Sometimes it takes much work and patience to figure out what kind of tape one is trading. Think of swing trading like fly fishing. Patience and prudence are of utmost importance – not to mention much work. Just think of the number of tools/flys, the seasons, the river, the rive temperature etc. etc. I have a multitude of charts for the same reason. Just think if one spends all day betting on the huge fish behind the log, one better have the perfect fly, the perfect water temp, the perfect time of day, the perfect cast, or the fisherman will go home hungry. You see my point, markets are multi- layered, multi-time-oriented, cycles within cycles. In a good swing trade, I prefer a medium sized fish that will feed me, but not leave me hungry; highly probable trades under a strict set of conditions specifically tailored for a specific type of event.

On to the charts.

Short interest and margin debt came out yesterday, and it is certainly interesting…..

NYSE + Nasdaq Short Interest ($B shares)

This chart clearly shows that there was no squeeze on new highs. It alludes to some entity or individual (a billion or so shares worth) was not phased by the new high. This jives with many breadth indicators IMO. In a true bull market shorts would have blown out like every other high. To be clear there are not many shorts,  I am more intrigued why shorts did not get squeezed. For this signal to entice me to swing long, I either want shorts to be squeezed or have a bunch of shorts that I know can get squeezed. A steady short position that grows at new highs, tells me to be patient….
[amprotect=nonmember] More of Volar’s charts and commentary below for anyone donning a secret decoder ring. If you are interested in becoming a Gold member then don’t waste time and sign up here. And if you are a Zero subscriber it includes access to all Gold posts, so you actually get double the bang for your buck.
[/amprotect] [amprotect=1,9,5,2] Nasdaq by itself

Basically, we could have a squeeze (small and only in the NAZ). BUT remember the NASDAQ COT data I posted all last week? Well, that says a bunch of traders are long, futures (bearish). What does all that conflicting info mean? Well… it is simple… there is little room for a squeeze and some entities are starting to bet against the trend. That is NOT bullish by any means, just a result of a potential turning point. So there are a bunch of crowded specs in the COT, but some are starting to short individual stocks (kind of sounds like the divergent breadth issues).

On to some potential buy signals!

All the divergences and the few buy signals without a real panic day tell me that I don’t want to get my feet wet on the long side until I have multiple robust signals.

ISEE Bollinger bands

This is an early buy signal, but we could embed as many of you know. CBOE is the same way. However, those that are short need to also keep an eye out here…

The numbers are a rough estimate of the number of days the ISEE embedded before the market bottomed. So yes we have a buy signal, but one may be up to a month early if they are not careful! Given the lack of breadth to this market, I am waiting for a better quality signal.

Change in the ISEE Equity

Yes this is a buy signal. The OCC and CBOE MoM change charts do not confirm. I will also note that in late 2007 the signal was repeated over and over and no dip buyers came to the table (the turning point). So my point is that if we are still in a bull market, buyers *should* step up and if they dont, I may really start to consider that we are entering a bear market.

Sentiment Index

This shows the same thing as the ISEE. Sure is nice to have multiple indicators that are supposed to give the same signal, give the same signal. Obviously this could embed as well. PATIENCE WE ARE NOT IN THE GREEN LET ALONE THE WHITE.

Change in sentiment index

This index does a good job, similar to bollinger bands, in gauging momentum. This also says patient grass hopper let the tape come to you… how many WEEKS were less than 3 eh?

Caveats for bulls:

First there is the VIX time spread. This is one good signal of panic. We are slowly turning… which in equities…. can be more bearish than bullish ( I think tradingmom mentioned that). I LIVE by JLL’s quote, “cover short on panic days.” Most good traders know that high volume means large traders (smart money) is getting a good fill, not exiting. Keep that in mind when you see high volume….

Seasonality

Very few bull markets have mojo from MAY to AUG. Some do, but few. The summer can be all over the board, and as I have said before, don’t plunge short near the holidays or Easter.

Also the AAII that EVERYONE is talking about is never black and white.

AAII Bullish Seasonals

This just goes to show there is more to meets the eye. Not all signals are linear, let alone the same throughout the year.

Aggregate Option Volume

OCC net option volume. This is Calls- Puts for the past 30 days. This is not the ratio, but the nest volume (x) share price to come up with $$ volume. Just a little bit of call buying eh?

Here I have coded the chart to show the seasonality the same way as my index above. Two things bulls need to keep in mind. (1) this is the worst stretch of the year for money to come in…. and (2) look how much money HAS come in. As a contrarian, I see this as an opportunity not to chase this higher. Like margin debt, short interest, and COT, net $$$ option volume shows excessive length in equities.

On a quick side note, per the last two charts. Notice that only the ignorant believe October is the worst month. It is a bad month in presidential election years, but outside of that, it is actually a great month. Just goes to show that nothing is ever black and white.

Change in aggregate option volume

Here you can see why I liked the last swing opportunity….. I will be patient, and not bottom feed here. I know the ISEE says to BTD, but this signal is not even close to a “buy.” I play probabilities, and multiple signals, not just one signal.

CBOE Equity C/P Ratio Analog Seasonality

This clearly shows that other similar bull market years had no call buying into the summer. It is possible a 99 year comes along and buying starts to pick up in the 2nd week of June. However, it is also possible this grinds lower into September. Just food for thought- nothing is every black and white.

APR margin data

Yup. That is still very very bearish. Fresh data for you rats.

Bottom Line: Be patient, wait for a panic day and a setup before you swing long IMO. I have seen ZERO selling capitulation, so I am very cautions on buying for a short-term swing here. Or I do have some buy signals, but they are not robust. Furthermore, none of my data suggests we have fuel to feed the fire for the bull case (except for the NAZ Short Interest), but just two hard selling days could do that. So could the market rally? Yes, but the conditions are not good enough for me to swing long. Over the last 1.5 years I am 3/4 on swing trades. One made 95 ES points, another made 275, another made 56, one lost 20 (all leveraged). I could care less if this rallies, the conditions are not what I am looking for (just yet). Some investors want to trade every single day, some want to call the P3, I just need my fish 😉

Volume will tell you more now than ANY price based momentum indicator here.

Cheers,

Volar
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