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Updated Sentiment

Updated Sentiment

by MoleJune 3, 2011

This is your sentiment update. Mole and I will get to the seasonality update, but it seems we were both quite busy on a short week.

I would just like to say that I have seen ZERO selling capitulation… which means if you are a dip buyer, caveat emptor.

I have been looking for another sentiment index to add to my arsenal, and I have finally found one. I have ignored market vane and consensus inc., because a simple chart will tell you those surveys are hard to use for timing.

So I found HFDSI, the Hulbert Financial Digest daily sentiment index. I love it. It is similar to II (institutional investors survey), but daily and a different calculation.

mole: that’s awesome – getting only weekly updates is one of the issues I have with AAII.

Wow did we get high on that last rally!

So after some mathematical manipulation I incorporated it into my index:

As you can see it does not change things much, but it does help smooth out my bollinger bands.

Also I added double bollinger bands and 7 week change on a composite chart for maximum coolness. The bollinger bands below are different time lengths; I owe that idea to RBW and Mole.

So my sentiment survey indicators may be entering a “buy” zone, but I am still being *very* patient. I want capitulation. Also the 7 week change can go more negative or stay negative a bit longer.

Mole: ‘Buy zone’ means nothing these days – the only edge to be had when it comes to sentiment in the past two years is to wait for extreme readings and even then we have been disappointed.

Here is the raw value of my index. Notice that the momentum signals may start to signal  “buys,” but one must keep in mind that we could drop along ways from here before we actually have a bunch of bears in the market.

So you can see we do not have that many bears, just yet. And put volume would jive with that…

Here is yesterday’s OCC (all equity all exchange) put volume of 7MM. Today may change that, but I am looking for 1-3 days in excess of 8MM puts.

All that being said, today we may have surpassed 8MM, which could mean we are nearing a potential swing low. However, I still recommend being patient and waiting for some “real” panic volume.

Here is the NAZ COT

Still no liquidation of a crowded long trade….

For due diligence, the economic surprise index is quite bullish looking.

Economic surprise index:

Here you can clearly see, one does not want to be plunging short on economic “misses.”

Mole: Exactly – this is why the news does not matter. Wouldn’t you think that anything who’s connected gets those reports way in advance of the crowd? Let’s not kid ourselves – by the time an of those ‘surprises’ make the news institutional traders have long been selling and are ready to buy the dip. I maintain: The news does not matter.

Lastly, a couple comments on seasonality.

Here is the VIX with Quartiles as opposed to standard deviations. I use quartiles because the VIX is log normal or not linear, and a standard deviation is normal. More specifically, even if one logs the VIX to normalize it, they will still find that it is skewed, which means the only real way to run the data is to use quartiles. I know you dont care about that, but that saves me explaining it on Disqus…

Mole: Here’s a great page on quartiles – it’s not as complicated as you may think – no PHD in math required 😉

Clearly there are bears, but I see no panic! I buy when emotional, moving average following, MACD following, Stochastic following traders who do not watch volume start to panic. I will admit I went long for a gap fill this am….. NEWS IS IRRELEVANT. Jobs have sucked for 2 years and today matters? I am done with the gap trade, and I am not swinging long here.

We are in summer volume season and poor seasonality season…. The ISEE equity today (intraday) is miles and miles away from beartard capitulation. Or in other words, swinging long will take some decent selling for me to step in 😉

Here are some monthly return bell curves for the S&P.

I added this just to show you that there is no edge in going long in JUNE. July has positive returns, but it does not exactly compensate you for your risk. The key here is that December is so far skewed to positive (left), while JUNE is the opposite of that. July can be a decent month, nevertheless; mole and I will get to all of that later…. sentiment turns then too….

So bottom line, have patience.

I wish you all the best of luck trading.


About The Author
Mole created Evil Speculator amidst the chaos of the financial crisis in early August of 2008. His vision for Evil Speculator is a refuge of reason, hands-on trading knowledge, and inspiration for traders of all ages and stripes. You can follow him and his nefarious schemes at various social media waterholes below.