Sentiment: This time is different

Preface: Explaining our market timing models 

We maintain several market timing models, each with differing time horizons. The “Ultimate Market Timing Model” is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.


The Trend Asset Allocation Model is an asset allocation model that applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. The performance and full details of a model portfolio based on the out-of-sample signals of the Trend Model can bsoe found here.



My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don’t buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the email alerts is updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.



The latest signals of each model are as follows:
  • Ultimate market timing model: Buy equities
  • Trend Model signal: Bearish
  • Trading model: Neutral

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of those email alerts is shown here.

Subscribers can access the latest signal in real-time here.


About that AAII sentiment…

It’s confirmed. The AAII weekly sentiment data was not a blip. While bullish sentiment advanced slightly from the previous week, it remains weak and the bull-bear spread is still below -20, which is a contrarian buy signal. While bullish sentiment did crater, bearish sentiment did not spike to levels indicating panic.



A similar set of circumstances was found in the Investors Intelligence survey. The %bulls skidded badly, but %bears fell too, though not as much as %bulls. The bull-bear spread consequently turned negative, which is interpreted as a contrarian buy signal.



While conventional sentiment analysis would conclude that these represent tactical buy signals, I beg to differ. This time is different, and here’s why.



Conflicting sentiment signals

Even though the AAII and II sentiment surveys show strong buy signals, a number of other sentiment models tell a different story.


The NAAIM Exposure Index, which is a survey of RIAs who manage individual investor funds, is neutral. As a reminder, a breach of the lower 26-week Bollinger Band of the NAAIM Exposure Index has been an excellent buy signal (vertical lines).



A detailed analysis of the NAAIM data shows the survey exposures at the first, middle, and third quartile breaks, as well as the maximum and minimum equity exposures. The minimum exposure of 16% means that there were no respondents who were short the market as they were several weeks ago. These results are inconsistent with a picture of investors who are panicked over the stock market’s outlook.



A similar lack of fear can be found in the options market. If investors are afraid of a sudden drop in stock prices, they tend to buy put option protection and drive up the price of puts compared to calls. The SKEW Index measures the relative pricing of out-of-the-money calls to puts. A high SKEW indicates the perception of high tail-risk while a low SKEW indicates complacency. Current readings are neutral to low. More importantly, the 10-day change in SKEW recently fell by -10%. Historically, such episodes have been reasonably good trading sell signals. In the last five years, there were 18 such signals. 11 resolved in a bearish manner (pink vertical lines) and seven bullishly (grey lines).




The bears are in control

Tactically, the bears are in control of the tape. Defensive sectors are all in relative uptrends.



Equity risk appetite factors are exhibiting negative divergences against the S&P 500. In particular, speculative growth stocks, as represented by the ARK Innovation ETF, broke a relative support level after holding up well for about a month.



SentimenTrader highlighted the spike in both new highs and lows and concluded that such a conditions has always resolved in a bear market. His observation is similar to one of the underlying elements of the Hindenburg Omen, where both new highs and new lows rise together indicating a bifurcated market (see Another Omen warning).



As well, Cross Border Capital pointed out that Fed liquidity injections had dropped dramatically last week, though the drop may be a data blip. Historically, the S&P 500 has been highly correlated with market liquidity.



If the decline in Fed liquidity injections is concerning, the more ominous sign is that quantitative tightening has only started. The Fed’s balance sheet fell a measly $10 billion in the week, which amounts to a roundoff error in a balance sheet of $8.97 trillion.




An oversold market

In conclusion, I interpret the AAII and II sentiment readings as the bulls have capitulated but the bears haven’t and there is unfinished business to the downside. Despite my intermediate bearish outlook, the market weakness late in the week left the stock market oversold, though sentiment indicators are still mixed. The VIX Index spiked above its upper Bollinger Band, which is a sign of a short-term oversold condition. As recent history shows, oversold markets can become even more oversold.



As well, the Zweig Breadth Thrust Indicator reached an oversold level on Friday. As a reminder, Zweig Breadth Thrust buy signals are triggered when the ZBT Indicator moves from oversold to overbought in 10 trading days. Such conditions are rare and I am not holding my breath for the signal. Nevertheless, it does indicate that prices are stretched to the downside.



Investment-oriented accounts should be positioned cautiously and take advantage of rallies to raise cash. Trading accounts should be aware that the market is short-term oversold and poised for a relief rally in the context of a downtrend.


20 thoughts on “Sentiment: This time is different

  1. Cam, I appreciate the way you do a deeper dive by knowing multiple sentiment indicators and doing a professional ‘weight-of-evidence’ conclusion. Most observers know one or two and use narrow insight. Thanks,

  2. BTW folks, I added a long comment yesterday very late in the day you may have missed. IMO it’s a worthwhile read.

    1. Ken,

      You shared a lot of valuable and lucrative nuggets in that post.

      I think the market will likely bottom way earlier before the inflation is beaten or the Fed pivots dovish. I hope we can find that bottom (or near the bottom).

      Thank you for sharing your wisdom.

  3. This time is different. From when prices meant something.
    Back in 1929 the US was not the world’s greatest debtor, but was a creditor. Before 1987 the Fed was not playing fix the market like it has for 35 years. As a consequence the market has been in “up” mode for about 30 years out of that 35, so when one looks at signals and how things turned out, the bullish bias to the data is blinding.
    Whether the Fed wants the Dems to win in 2024, or the Dems can influence the Fed, honestly I dunno, but I will take Ken’s word for it on the expected performance come the end of this year.
    What really impresses me is what happened to mortgage rates. Have rates ever jumped 60% or more in such a short time frame ? What does this tell us about the real cost of money. To me this is saying “I’m gonna break first” We did a refi in Jan 2021 at 2.875 for a 30 yr fixed, now they are 5%+, so what would happen to the housing market if by late summer they are at 8% or even more, who knows? When approx 1 million new houses are being built, generating 100s of billions of new debt/credit, being leveraged by fractional lending, this is vital to the economy. They haven’t even started unloading the MBS they hold if I am not mistaken, so how high will rates go?
    Will the meaning of price return? Some day, but my feeling is that the Fed has not tossed in the towel yet, and when something systemic breaks they will break out the printing press….this is what fiat currencies do, because ultimately they are not based on something real, just some kind of promise, but they really do help ease transactions which is why we use them.
    I don’t know if the prices of really useful things like copper or silver will help in navigating these waters, I just believe that nobody is going to get them and refine them for free, futures and storage issues aside like for oil in march 2020, at some point the reality that useful stuff is useful has to make itself known. Only when?

    1. Look at prices for copper, SCCO and $SPX for the periods around 2000, 2008 and now. It’s something to keep an eye on for the coming years. When we get a big crash and everything gets dumped, copper prices will go down too, as will copper mining stocks (doesn’t have to be SCCO, take your pick) but the bounce from the lows should be impressive.

  4. I guess, “Sell in May and go away” will apply to this year for the Investors. Traders mostly benefit during volatile times, so game on.

  5. Let’s see how markets react to megacap techs’ earnings next week to get a better feel going forward.

    As much as Powell wants to emulate Volcker he faces a different set of realities. Chief among them is the financialization of US economy. So it is safe to say that market is the economy. From this perspective it is very easy to see if there is a big drop in market the real economy will decelerate very quickly.

    Powell wants to hurt asset prices to rein in the inflation. Let’s see if he can get it done. The ramification is huge. Observe and adjust. The laws of maximum randomness and time compression apply here.

  6. Personally, I think the brutal selling on Thursday and Friday sets up a bullish scenario for next week. One of the most common patterns in markets is the pullback prior to a new leg up. The shakeout that clears the weak hands. The pause that refreshes.

    1. Bond futures are diverging from index futures this evening. That’s a notable change.

  7. It is still early in the week but we are seeing a weekly gap down this morning. The last time we had a weekly gap down on the S&P500 was 2020-03-13. That gap did not get fill until 8 weeks later which was quite a trip to the downside. Updated chart on weekly summation of S&P (red) and Naz (green line). Horizontal magenta double lines are weekly gap downs. S&P level of 4020 would be the gap fill for the weekly gap up (cyan) from 2021-04-02.

    1. IMO we are still 3 to 5 trading days from a tradable short term bottom. The easiest way is to look at the parabolic SAR which just flipped last Thursday-Friday. Allowing pSAR to catch up to price and it will give an indication of where the inflection might be. The other simple way to look at breadth reversal might be to use the simple moving average AvgRatio = Average(SP50DRatio, 9); where SP50DRatio is SPIssuesAbove50DayMA / SPIssuesBelow50DayMA (see chart). So far it is still a lot easier to short than to go long, as the simple strategy showed in the chart.

  8. Nice shakeout underway on a Monday.

    All bond holdings (TLT/ IEF/ IEI/ TIP) doing what they’re supposed to do.

    Added marginally to TIP on early weakness.

    Adding to VT here.

    1. Reopening intraday positions in SPY/ QQQ.

      Going after egg on my face again and predicting a green close.

      My accounts are all green at the moment for one reason – bonds.

    2. Adding to SPY/ QQQ on strength.

      Adding further to VT, also on relative intraday strength.

    3. Cam has initiated a trade alert-

      (Trade Alert) Initiating a long S&P 500 position. Time stamped 751 am pst.

    4. Taking partial profits on SPY/ QQQ here – just enough to erase Friday’s day trading losses. May opt to hold the remainder beyond end of day.

    5. Looking forward to Cam’s write-up. I think this rally has room to run back up to 4500+. JMO, of course.

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