Technical risk sentiment signal

On the sentiment front, we have noted over the past few weeks that negative sentiment among short-term traders is at levels that have coincided with major lows over the past few years. But one concern I have is that after the open buy/buy volume ratios on the SPX and Nasdaq 100 index components (NDX – 14,009.54) have peaked in late January, these indices are slightly below the levels at which they were when their respective ratios peaked. This is not normal and potentially indicates that longer-term investors are overwhelming traders who bought the dips a few weeks ago..”

– Monday Morning Outlook, February 22, 2022

Reviewing last week’s comment, the above snippet stood out. Even though short-term traders had become more bullish after hitting a bearish extreme, major equity benchmarks did not rebound as they normally do when traders moved from an extremely bearish position to a more bearish position. bullish.

Additionally, there were early indications that traders were losing confidence in a rebound and creating bearish positions again, as the S&P 500’s open buy volume ratios (SPX – 4,384, 65) and the Nasdaq-100 index (NDX – 14,189.16) components were turning higher. Indeed, this was a red flag, as the SPX and NDX both fell below their respective late January lows. Stocks headed south to start the holiday-shortened week as Russia prepared more to invade, then finally shifted to Ukraine. In an already uncertain environment, traders and investors initially sold before more clarity on the situation emerged later in the week.

Even though January’s stock market lows were breached, Thursday’s major reversal and Friday’s follow-up buying pushed benchmarks back above key levels, which was an encouraging development for bulls.

Buyers came in strong after sanctions imposed on Russia for its attack on its non-North Atlantic Treaty Organization (NATO) neighbor were not as severe as feared. Specifically, no sanctions were imposed on Russia for exporting oil and gas. Such sanctions would have only heightened rising inflation concerns and more aggressive rate hikes, prompting investors to reduce their risk ahead of Russian-Ukrainian tensions.

For what it’s worth, the buy/call volume ratios on the SPX and NDX components are clearly on their way up. They both bottomed on Feb. 11, when the SPX closed at 4,418 and the NDX at 14,474. long-term buyers to crush short-term traders – the opposite of the red flag warning mentioned last week.

The growing number of bears, whether evident in various surveys or in the options market, have dragged stocks lower as the Fed shifts from extremely dovish policy. There have been various technical breakdowns from a short to medium term perspective along the way. For a serious unwinding of this negative sentiment to occur, the broader market needs to clear key resistance levels.”

– Monday Morning Outlook, February 22, 2022

Over the past few weeks, we have observed that pessimistic traders’ sentiment is making conditions ripe for a major bottom. But we also warned that technical overhead levels need to be removed to pressure bears to hedge and/or move investors off the sidelines and into stocks at these depressed levels.

One survey that shows rising declines is Investor’s Intelligence (II) weekly survey, whose respondents are newsletter advisors. In fact, the charts below give you a glimpse of the growing pessimism in this survey, as the percentage of bears is almost higher than the percentage of bulls. This has only happened a few times over the past six years.

The first chart below calculates the percent bull minus the percent bear of respondents. As such, the blue line will cross below zero as the bears break past the bulls. Going back to 2016, when this happened, it coincided with significant buying opportunities.

SPX Investor Intelligence

Additionally, the quantified data in the chart below shows that when sentiment in this survey is at par with the levels we see now, the SPX, on average, is outperforming its historical “anytime” returns on returns at short term and intermediate. -long term delay. As the chart indicates in bold, we are currently in the 20-30 percentile of the all-time readings of “percentage bullish minus bearish,” which bulls should welcome.

The risk, of course, is that future readings will turn even more bearish, in which case the expected outperformance is reduced, as such a broad-based downtrend takes longer for the market to build a base and embolden potential buyers.

SPX Returns ii

If you are aggressive and the timeframes above match your holding periods, you can play the quantized results. But with benchmarks still trading below key technical resistance levels, a tighter than normal hedge or leash should be considered for bullish bets.

A technical risk, for example, is that the SPX has been trading in a declining channel since November. The upper rail of this channel begins this week at 4,485, just above the 4,475 level which marks double the 2020 closing low. On Friday, the trendline will come in at 4,450.

If selling resumes, the low of this rail sits at 4,033 today and ends the week at the 4,000 millennial mark. But the SPX should first break below last week’s low, which was supported by its 320-day moving average, another long-term trendline we’ve discussed in the past (in May 2019, it served as support, and in March 2020 a break of this trendline led to vicious selling).

According to the chart below, it is encouraging for bulls that the SPX closed last week above 4,300, which marked several lows since July. Moreover, it closed above its 260-day moving average, which is about a year of trading.

But technical risks remain amid the rebound, according to the discussion above and the chart below. More technical improvements need to happen before the bears finally feel like they have to give up.

Finally, it was noticed last week that after the Cboe Volatility Index (VIX – 27.59) moved closer to the January high on an intraday basis, it closed Thursday and Friday below the 33 area. .20-34.44, double the close of last year and this year. low closure. A fence over this area would wave another caution flag.

SPX 260 320

VIX Six Month Daily

Todd Salamone is Schaeffer’s senior vice president of research.

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