We decided to cover some sentiment charts on the DecisionPoint Show yesterday. It is an interesting picture. Clearly sentiment is bearish. The question is whether it is bearish enough to start expecting a bear market bottom.
Let's first talk about sentiment in a general sense. The idea behind using sentiment indicators is to determine when investors have reached a saturation point of bullishness or bearishness. For example, tops are formed when everybody who is going to buy has bought, while bottoms occur after there is no one left to sell. Using subjective measures like sentiment polls makes it difficult to determine exactly when these extremes have been reached; polls have never been particularly good for bottom or top picking. We use three charts that are based on the "numbers" not emotional polls: Rydex Ratio, Put/Call Ratios and National Association of Active Investment Managers (NAAIM) Exposure.
We will start with our Rydex Ratio analysis chart. All Rydex mutual funds were renamed after the Rydex company was purchased by Guggenheim Investments, but we continue to use the legacy "Rydex" name for the ratios. It is a closed group of funds that consist of bear funds, money markets and bull sector funds. It is a "money where your mouth is" indicator. Rather than get a poll, we track how much money goes into bear/money market funds versus bull/sector funds.
The ratio is calculated by taking the bear/money market funds divided by bull funds. The lower the ratio, the more bullish investors are and conversely, the higher the ratio, the more bearish investors are. We invert the Rydex Ratio so that oversold readings are on the bottom and overbought readings are on the top. Please note that the data for the ratio doesn't come in until late evening.
We can see that investors have moved out of bull/sector funds and into cash. We are seeing an increase in bear funds, but not to the level we saw at the end of the 2020 bear market. We've also have not seen the same amount of money in bull funds as at the end of 2020 bear market. This is reflected in the Rydex Ratio which is also not as low as it was at the end of 2020 bear market.
The put/call ratios are certainly extended on our inverted scale; but again, these ratios are not nearly as bearish as they were at the end of the 2020 bear market. Data for put/call ratios comes in later in the evening so these numbers are from yesterday.
The NAAIM Exposure Index certainly shows that money managers are less exposed, but we aren't seeing the same lows in exposure as we did at the end of the 2020 bear market. Data is released late on Thursdays so the second bar is a duplicate of the last data point.
Conclusion: Bearish sentiment and exposure are not at the capitulation levels we saw at the end of the 2020 bear market. If you're banking on a reversal because everyone is polling bearish, note that the money flows and exposure aren't reflecting sentiment as bearish enough.
The DecisionPoint Alert Weekly Wrap presents an end-of-week assessment of the trend and condition of the Stock Market, the U.S. Dollar, Gold, Crude Oil, and Bonds. The DecisionPoint Alert daily report (Monday through Thursday) is abbreviated and gives updates on the Weekly Wrap assessments.
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MAJOR MARKET INDEXES
Each S&P 500 Index component stock is assigned to one of 11 major sectors. This is a snapshot of the Intermediate-Term (Silver Cross) and Long-Term (Golden Cross) Trend Model signal status for those sectors.
RRG® Chart: Below we have the RRG chart using the $ONE benchmark while the market is in decline. We are using the "Weekly" version as it is a better representation of the overall market strength versus the twitchy daily version.
What is important to note is that none of the sectors have a bullish northeast heading. All sectors have a bearish southwest heading with the exception of XLF. XLF is attempting to move northward toward Improving. However, it has a LOT of ground to cover.
XLE was the strongest sector, but is losing ground having moved into the Weakening quadrant.
XLB, XLU and XLV are the only three sectors in the Leading quadrant. XLB and XLV are likely to move out of this quadrant in the next few days. XLU is beginning to weaken, but is still firmly in the Leading quadrant.
XLP had been headed toward the Leading quadrant, but has hooked around and is now moving toward the Lagging quadrant.
XLC, XLI, XLY and XLK are not only in the Lagging quadrant, they also have a bearish southwest heading.
RRG® charts show you the relative strength and momentum for a group of stocks. Stocks with strong relative strength and momentum appear in the green Leading quadrant. As relative momentum fades, they typically move into the yellow Weakening quadrant. If relative strength then fades, they move into the red Lagging quadrant. Finally, when momentum starts to pick up again, they shift into the blue Improving quadrant.
CLICK HERE for an animated version of the RRG chart.
CLICK HERE for Carl's annotated Sector charts.
THE MARKET (S&P 500)
IT Trend Model: NEUTRAL as of 1/21/2022
LT Trend Model: SELL as of 5/5/2022
SPY Daily Chart: Support was held on today's small rally. It formed a bearish filled black candlestick. It is bearish because bears were able to drag price down below the open. However, bulls were able to keep the positive close. If bears are wrestling the reins from the bulls as this suggests, we wouldn't expect this support level to hold.
The indicators remain very negative. The PMO is now technically in oversold territory given its typical range is between -2 and +2, but given its angle of descent, we expect it to move much lower. To give you context, the PMO was below -7.5 when we saw the 2020 bear market low.
Here is the latest recording:
Topic: DecisionPoint Trading Room
Start Time: May 9, 2022 09:00 AM
Meeting Recording Link.
Access Passcode: May#on9th
S&P 500 New 52-Week Highs/Lows: New Lows have been expanding as expected.
From yesterday but still notable:
"Below is a three-year daily chart. For context, we saw -300 reading on New Lows during the 2020 bear market. This is stretched, but certainly not oversold. Notice that the 10-DMA of the High-Low Differential dropped much lower as well before it was all over."
Climax* Analysis: There were no climax readings today, but yesterday's downside exhaustion climax certainly called it. There was a wide range of back and forth today, but the decline took a break, and the trend did not reverse. We think this allows for more downside.
*A climax is a one-day event when market action generates very high readings in, primarily, breadth and volume indicators. We also include the VIX, watching for it to penetrate outside the Bollinger Band envelope. The vertical dotted lines mark climax days -- red for downside climaxes, and green for upside. Climaxes are at their core exhaustion events; however, at price pivots they can be seen to be initiating a change of trend.
Short-Term Market Indicators: The short-term market trend is DOWN and the condition is NEUTRAL.
The STOs have not actually bottomed and are showing positive divergences. Until we have a bottom on these indicators, this is tentative, not final. Something to watch.
Intermediate-Term Market Indicators: The intermediate-term market trend is DOWN and the condition is SOMEWHAT OVERSOLD.
The ITBM and ITVM present the same tentative positive divergences as the STOs.
PARTICIPATION and BIAS Assessment: The following chart objectively shows the depth and trend of participation in two time frames.
- Intermediate-Term - the Silver Cross Index (SCI) shows the percentage of SPX stocks on IT Trend Model BUY signals (20-EMA > 50-EMA). The opposite of the Silver Cross is a "Dark Cross" -- those stocks are, at the very least, in a correction.
- Long-Term - the Golden Cross Index (GCI) shows the percentage of SPX stocks on LT Trend Model BUY signals (50-EMA > 200-EMA). The opposite of a Golden Cross is the "Death Cross" -- those stocks are in a bear market.
Yesterday's comments still apply:
"The bias is bearish in all three timeframes. The SCI and GCI are falling and are well below our 70% bullish threshold. The %Stocks > 20/50/200-day EMAs are all below the SCI/GCI which tells us we shouldn't look for the SCI and GCI to rise anytime soon."
CONCLUSION: Yesterday's downside exhaustion climax fulfilled with a positive close today. However, we have bearish filled black candlestick today that implies we will see lower prices tomorrow. Indicators are very negative, but in most cases, not as negative as the 2020 bear market readings. We currently have positive divergences on our primary indicators, STOs and ITBM/ITVM, but until they bottom, we shouldn't get too excited. Extreme caution is still warranted.
Erin is 20% exposed with 15% in bear funds.
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Yesterday's comments still apply:
"Bitcoin lost strong support at the 2022 low. The RSI and Stochastics are oversold, but the PMO is not. With very strong volume to the downside today, it could be time for Bitcoin to consolidate on or around $27,500. Bottom fishing here isn't wise, at least until price finds some support."
Yields fell but the longer-term rising trends haven't been compromised.
The Yield Curve Chart from StockCharts.com shows us the inversions taking place. The red line should move higher from left to right. Inversions are occurring where it moves downward.
10-YEAR T-BOND YIELD
Yields continued lower today. $TNX is now sitting on the short-term rising bottoms trendline. We do make out a bearish rising wedge. The RSI is positive, but falling. The PMO has now topped below its signal line which is especially bearish. Stochastics are still looking favorable, but they have now dropped slightly below 80. It could be time for rates to cool, but we don't expect them to drop below support at 26.50.
IT Trend Model: BUY as of 6/22/2021
LT Trend Model: BUY as of 8/19/2021
UUP Daily Chart: Yesterday's comments still apply:
"The Dollar continues to consolidate sideways. Indicators are still favorable so we expect a breakout."
IT Trend Model: NEUTRAL as of 5/3/2022
LT Trend Model: BUY as of 1/12/2022
GLD Daily Chart: GLD dropped below the January high and is now sitting on the longer-term rising bottoms trendline. We don't expect it to hold here given this is the second close beneath the 200-day EMA. The PMO is falling below the zero line, the RSI is negative and Stochastics are dropping again.
GOLD Daily Chart: Sentiment is getting more bearish, but hasn't reached extremes. The next level of strong support doesn't arrive until we hit January/February lows.
GOLD MINERS Golden and Silver Cross Indexes: Yesterday's comments still apply:
"GDX lost support at the 200-day EMA and horizontal support at $33.50. The indicators are bearish and getting worse. There are no Gold Miners with price above their 20/50-day EMAs and more are losing price support at their 200-day EMAs. Certainly we are at oversold levels, but that can persist for weeks. It isn't time to look for a reversal, it is time to look for support at $28.50."
CRUDE OIL (USO)
IT Trend Model: BUY as of 1/3/2022
LT Trend Model: BUY as of 3/9/2021
USO Daily Chart: USO continues to slide lower. It is now testing the short-term rising bottoms trendline. That trendline forms the bottom of a bullish ascending triangle. We would expect a rebound and breakout based on the pattern, but the indicators certainly don't support this expectation. If we get the breakdown from this bullish pattern, that would be considered especially bearish. Still, we don't expect a drop below the March low. This could end up being a trading range between $70 and $83.
IT Trend Model: NEUTRALas of 1/5/2022
LT Trend Model: SELL as of 1/19/2022
TLT Daily Chart: Bonds continued to rebound today, but formed a bearish filled black candlestick. The indicators are starting to look up. Yields are beginning to stall. This could offer TLT an opportunity to rally. However, we don't see interest rates falling enough to make TLT a good investment right now. There are far too many levels of resistance to push through and we do not believe interest rates are going to drop much further.
Good Luck & Good Trading!
Erin & Carl Swenlin
Technical Analysis is a windsock, not a crystal ball. --Carl Swenlin
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Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional. Any opinions expressed herein are solely those of the author, and do not in any way represent the views or opinions of any other person or entity.
NOTE: The signal status reported herein is based upon mechanical trading model signals, specifically, the DecisionPoint Trend Model. They define the implied bias of the price index based upon moving average relationships, but they do not necessarily call for a specific action. They are information flags that should prompt chart review. Further, they do not call for continuous buying or selling during the life of the signal. For example, a BUY signal will probably (but not necessarily) return the best results if action is taken soon after the signal is generated. Additional opportunities for buying may be found as price zigzags higher, but the trader must look for optimum entry points. Conversely, exit points to preserve gains (or minimize losses) may be evident before the model mechanically closes the signal.
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DecisionPoint Sector Chart List
Price Momentum Oscillator (PMO)
Swenlin Trading Oscillators (STO-B and STO-V)
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