THE PRIMARY LEADER FOR THE CURRENT BULL RUN HAS BROKEN DOWN
Apr15

THE PRIMARY LEADER FOR THE CURRENT BULL RUN HAS BROKEN DOWN

While there is continuing reason to believe that the foundation remains in place for further upside to this bull market, cracks are beginning to emerge in the underlying technical foundation. Earlier in the week I highlighted the primary Trumps trades being in the beginning stages of unwinding. Now there are very obvious signs that primary leadership for the market, at the very least, needs a prolonged period of rest. Below is the chart for the SOX (Semiconductor Index), which has been a bastion of absolute strength and leadership for the entirety of the ascent from the February 2016 lows. The trajectory off those lows, for the first time, has been compromised on a weekly basis. click chart to enlarge When you look at the current market, it's becoming obvious that investors are having a difficult time rectifying increased exposure with a near non-stop  symphony of scary headlines. Whether increasing geopolitical risk on virtually all fronts or increased domestic fiscal policy risk, the reasons to sell are numerous, while the reasons to buy are scant. That very dynamic, however, could end up being the bulls best hope. Fear remains too high for any substantial pullback, UNLESS a geopolitical event or overwhelming signals of an economic slowdown interfere with the sentiment dynamic. That sentiment dynamic is best illustrated by the long-term moving averages of the combined put/call, which are telling a story of absolute disbelief in a market at record highs. Whether further upside awaits or a breakdown is imminent, the markets are no longer on the solid ground that allowed for studies like this to emerge in Q4 of last year. It's a coin flip going forward.         Disclaimer This website is for informational purposes only and does not constitute a complete description of our investment advisory services. No information contained on this website constitutes investment advice. This website should not be considered a solicitation, offer or recommendation for the purchase or sale of any securities or other financial products and services discussed herein. Viewers of this website will not be considered clients of T11 Capital Management LLC just by virtue of access to this website. T11 Capital Management LLC only conducts business in jurisdictions where licensed, registered, or where an applicable registration exemption or exclusion exists. Information contained herein is not intended for persons in any jurisdiction where such distribution or use would be contrary to the laws or regulations of that jurisdiction, or which would subject T11 Capital Management LLC to any unintended registration requirements. Visitors to this site should not construe any discussion or information contained herein as personalized advice from T11 Capital Management...

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AN UNORTHODOX LONG-TERM INDICATOR IS ABOUT TO SCREAM BUY
Oct30

AN UNORTHODOX LONG-TERM INDICATOR IS ABOUT TO SCREAM BUY

The combined put/call ratio is a useful tool to measure sentiment, yielding contrarian driven results that are beneficial to an investor more often than not. There are other ways to use the put/call, however, beyond your simple when the put/call moves up to X level then the market should be bought as pessimism is excessive and when it moves down to X it should be sold as optimism is excessive. Some pretty impressive results can be had from examining two very long-term moving averages of the put/call ratio, in this case the 260 and 600 day simple moving average, with the intent of studying what happens to the markets when these moving average cross. Think about what it means for just a second when these two long-term moving averages cross. It's a pretty important indicator of comfort or discomfort with a market, not in a contrarian sense, in that comfort equates to complacency. But, rather, in a very real sense, as in this case it equates to comfort that has evolved from some very pessimistic conditions prior. With that frame of thinking in mind, when the 260 day moving average crosses below the 600 day moving average, it represents capital becoming comfortable moving back into the markets following a pronounced period of pessimism. The 260 day moving average is above the 600 day moving average exclusively during recessions and panics. It represents an investor class that basically hates the market. The 260 day moving average going back below the 600 day moving average represents an investor class that is warming up to the market again, with capital moving into risk assets. Here's a look at what happens to the S&P 500 12 months following capital becoming comfortable with the market as reflected by the put/call ratio: click chart to enlarge   The most impressive part of this study is not the average gain of 16.87% in the 12 months following the sentiment shift, but rather the fact that the maximum drawdown once the cross takes place averages 2.2% when the signal is taken at month end once triggered. Essentially, once this sentiment shift takes place, the markets simply take off, without much in the way of looking back over the next 12 months. A slice of apple pie amidst the chronic pessimism and indecision investors face at this juncture....

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FRONT RUNNING SELL IN MAY
Apr29

FRONT RUNNING SELL IN MAY

Sell in May and go away is a long lived axiom on Wall Street that encompasses investor skepticism regarding what are typically volatile, low volume trading months of June-August. It is then understandable, especially in today's environment of deeply-rooted bearish sentiment, why investors and traders would attempt to front run such a poetic use of words in a single compact phrase. The front running of sell in May comes just as investor sentiment according to AAII has gone from a little bullish to somewhat bearish to simply throwing up hands and shrugging shoulders in disgust, with the ultimate conclusion being that investors just don't know what will happen from here. Bearish sentiment is again spiking as neutral sentiment shoots through the roof. It is only natural then, all things considered, that investors would be falling over one another to get a jump on the sell in May trade. Unfortunately, markets are rarely so accommodating and not easily impressed by poetic meter. The more investors piling into this trade over the next week or two, the more the chances of a rebellion by the market to challenge the conventional wisdom. While selling in May and going away might prove to have been the correct move given 20/20 hindsight, the trade will be a difficult one to execute with any confidence given the preponderance of bearish participants causing waves to appear due to their piling on in one direction.  June - July may ultimately prove a more suitable environment for bearish positioning, avoiding the chop to come....

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THE MOST IMPORTANT CHART FOR 2016 ZENOLYTICS EDITION
Dec28

THE MOST IMPORTANT CHART FOR 2016 ZENOLYTICS EDITION

Being that there is an abundance of pessimism in today's equity market, it is only natural that we should review the scope of that pessimism relative to the past. The chart below displays the 200 day moving average for the combined put/call ratio only. I have noted previous circumstances of gloom as reflected in a dramatically increased moving average during the calendar year. 2015 marks the fourth greatest increase in the combined put/call ratio since 1996, which is as far back as my put/call ratio chart goes. The other instances of a dramatic increase in the put/call 200 day moving average took place in 2001 (+22%); 2011 (+14%); 2002 (+14%). This year the 200 day moving average of the put/call has increased 10%. In 2001 and 2002 the pessimism was justified coming off the bursting of the technology bubble. We were in a recession. There was a prevalence of systemic risk. The Federal Reserve plunged the liquidity sword deep into the bowels of the economy by taking the Fed Funds rate from 6.5% in 2000 to near 1% in 2003. This is by no means the economy of today. The Fed is confident enough in the economy to be on the path towards a normalization of interest rates. There are no pockets of dramatic overvaluation. There is no extension of balance sheets into the stratosphere. The consumer has not concentrated assets in any particular class, as they are still afraid of purchasing real estate and think by touching stocks they will get contract AIDS. In the meantime technology has recaptured its spot at the top of the market food chain. For the time being, mega-cap technology is creating a disproportionate amount of the gains in the Nasdaq Composite and Nasdaq 100. As investors become less fearful of every dark shadow they will inevitably open up to opportunistic investments with greater upside causing the market breadth groupies to squirm back into their respective holes.  Financials also have stable footing going forward as earnings growth within an increasing rate environment should drive share prices higher over time. Large financial companies have been hell bent on keeping their balance sheets conservative leaving room for increasing earnings growth as confidence prevails. There are a ton of other factors. I've discussed them before and will continue to discuss them in the months ahead. Secular bull markets don't top on fundamentals, but rather when psychology reaches a euphoric tipping point. There is only misery in this bull market and that's a great thing. Disclaimer This website is for informational purposes only and does not constitute a complete description of our investment advisory services. No information...

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THIS SENTIMENT INDICATOR IS A BEAR’S WORST NIGHTMARE
Dec07

THIS SENTIMENT INDICATOR IS A BEAR’S WORST NIGHTMARE

History rhymes and so do bull markets. The 90s bull offers the astute investor a grab-bag of tidily wrapped treats for the taking. The treats come in the form of snippets of information that hint to us what to expect from a technology led bull market that is doubted, lambasted and scoffed at for most of the way up.  With this in mind, I present quite possibly the only sentiment indicator that should be in the toolbox of an investor: The put/call ratio. What you see below is a moving average only version of the put/call going back nearly 20 years. You will immediately notice that we have not even started to dent the skeptic sentiment that marks important tops for secular bull markets. Instead put buyers remain resilient in their conviction that every 5% pullback will turn into a 25% pullback. A bear market will emerge. The skeptics will fly high above the city merrily cheering as the optimists are herded back into their lives of perpetual peasantry.  The chart below flys in the face of this type of thinking while telling us exactly why the pullbacks are so short lived. In three words: Too many bears.  click chart to enlarge...

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REDEFINING EXPECTATIONS FOR THE PUT/CALL RATIO DURING SECULAR BULL MARKETS
Sep22

REDEFINING EXPECTATIONS FOR THE PUT/CALL RATIO DURING SECULAR BULL MARKETS

Let's begin this post with what I think is an obvious presumption: We are currently in a bull market that is secular in nature. I base this presumption on a number of factors, most important is the simple fact that numerous important indices are posting consistent all-time highs. Without getting into the technical particulars (these are easy to find if you spend 20 minutes on this site), all-time highs in leading indices following an extended period of crisis, doubt and under-performance can generally be trusted to signify a bull market that is much more than cyclical in nature. If we accept this presumption, then we must also accept the fact of what a secular bull market entails at its core: An expansion of ranges for all available metrics. This is regardless of whether these metrics are technical or fundamental in nature. In other words, price/earning ratios form an expansive new range. Markets caps that were previously thought of as absurd become the new normal. Technical measurements of excess are rethought and reformed. The very nature of a bull market is rethinking what are acceptable measures of prosperity. With each new secular bull market this rethinking process has occurred, which eventually has led to instability due to the paradigm shift that takes the economy into places where protective legislative and corporate measures fail. We are far from this point, but the reason it is worth mentioning is to aide in conceptualizing how dramatic the shift in the pricing landscape (ranges in price) must be that it challenges the very structure of economy. Let's now use the aforementioned presumption in paragraph one and fact in paragraph two to look at a favorite measure for gauging sentiment. The put/call ratio is one of the most valuable tools to measure sentiment. There is one consideration, however, that investors fail to make during bull markets. The absence of this consideration creates false signals galore that dissuades investors from considering the put/call ratio as a bull market matures. The consideration is the fact that just as multiples, market caps and technical indicators will face an expansion in what is seen as normal ranges, so will the put/call ratio. This means that the measurement previously considered to be golden at picking tops for a bull run, will fail consistently as a market matures. As a bull market expands, so should an investors expectations of what is considered "extreme bullish sentiment." Let's look at a long-term chart of the combined put/call ratio using 20 & 100 day moving averages only, looking all the way back to 1995-present: click chart to...

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A SENTIMENT UPDATE TO INTERPRET HOW YOU WISH
Jun15

A SENTIMENT UPDATE TO INTERPRET HOW YOU WISH

What separates an amateur from a professional on Wall Street? The separation doesn't have anything to do with a professional designation, your pedigree, a license, years worked or people you know. It has little to do with the type of car you drive, how much hair gel you use, the type of music you listen to or the number of Gordon Gekko lines you can imitate. It has everything to do with knowledge. There are people in their mid-20s trading six figure accounts from a one room apartment who are more advanced in thought and analysis than some fund managers. The fact that a person wakes up each morning, puts on a suit and tie, scurries out the door into a large office full of trading screens does not make that person a professional. It makes that person a corporate participant on Wall Street. A cog in the giant machine that keeps the capital markets spinning. If the overly-observant media and public would simply choose their labels better, perhaps Wall Street would have a far better reputation than it currently does. The word professional is defined as: Having or showing great skill; expert. When a majority of retail investors who come to rely on "professionals" for advice have been burned over an extended period of time, the word professional then becomes compromised. One of the ways I classify a true professional on Wall Street, in the classic definition of the word, is an individual who knows what method of analysis to use when. This individual realizes that the markets take advantage of those who come to believe in one form of analysis, clinging onto it regardless of market conditions. Just as the markets change continuously so does its treatment of the popular analysis used over a certain time frame. Sentiment is one form of analysis that is constantly shifting in relationship to the markets. Whether it is the use of the VIX, various sentiment surveys, odd lots shorts, outstanding margin debt or the put/call ratios, there is no magic wand when it comes to sentiment. It is, perhaps, the most finicky form of analysis. There is no other popularized form of analysis, other than oscillators perhaps, that claim more causalities in trading and investing than blind trust in sentiment indicators. They fail constantly. They get investors into bear markets prematurely, often at the point where the final leg of the bear market is hell bent on the most severe destruction. They get traders to go short bull markets way early, just as the uptrend is entering its sweet spot. You have to know when to ignore it. Unfortunately, there...

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THIS SENTIMENT INDICATOR JUST REFUSES TO GIVE BEARS WHAT THEY WANT
May12

THIS SENTIMENT INDICATOR JUST REFUSES TO GIVE BEARS WHAT THEY WANT

What is it about the current market that has left so many otherwise intellectually esteemed individuals dumbfounded when it comes to proper allocation of assets? Admittedly, this has been a difficult market to keep up with if the quality of your work is predicated by your ability to keep up with a benchmark. Without passing judgment or exercising bias of any sort let's look at exactly what is going on in the market as of the close Friday. Again, no passing judgment or exercising bias. Simply a look at what is occurring in 2013: - Dow is at an all-time high - S&P 500 is at an all-time high - Russell 2000 is at an all-time high - Nasdaq Composite is at a 10+ year high - Dow Transports are at an all-time high - NYSE Healthcare Index is at an all-time high - XLP - Consumer Staples ETF is blazing a new all-time high each week It is not just market strength we are talking about so far in 2013, it is strength in key sectors that typically attract a large international, institutional presence. Joe Smith from Wichita, Kansas doesn't wake up one day to turn on CNBC seeing that the markets are hitting new highs and put in a buy order for Kellogg or Colgate Palmolive. It is the institutional money that is seeing increased demand for a properly performing asset class that doesn't have an increasing potential for debt orchestrated periods of shock and awe to the downside that is buying up these names. It is not just any institutional investor either. It is Asian, European and Latin American institutions, alongside US firms that are piling into these names. The prototypical image of a rally of this nature being led by a bunch of dummies simply doesn't apply here. Those of you who are constantly drawn to this image need to rewire your synapses to correspond to the present day. This isn't the 90s or the 2000s. It is an entirely different market ecosystem that instilled enough fear and hate for equities into the masses that they are perfectly fine with allowing all-time highs to become nothing more than a news event, as opposed to anything having to do with enhancement of their overall net worth. When the general public does return to the market their footprints will be clear. Speculative stocks will rise in a manner that is disproportionate with any positive fundamental developments. Buying becomes sloppy. Pullbacks become more difficult to gauge accurately. The entire infrastructure of the market becomes increasingly unstable as a result of the erratic participation this class of investor brings...

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HOW THE CURRENT MARKET PICTURE STACKS UP AGAINST THE CURRENT SENTIMENT PICTURE
May01

HOW THE CURRENT MARKET PICTURE STACKS UP AGAINST THE CURRENT SENTIMENT PICTURE

Given the state of information indigestion that is prevalent in today's financial world, it is only proper that I begin this with a little bit of history. History in this case is a little over one month ago. It was at that time I posted an article titled, "Using The Put/Call Ratio To Forecast 5% Correction." The conclusion that was reached as a result of observing the put/call ratio on March 30th was that the stock market was, at a minimum, one month away from a correction of any substance. Sentiment, however, is but one tool in an investor or trader's arsenal of weapons. It must be used selectively based on the nature of the market at any given time.  You can always sniff out an inexperienced investor by the level of importance they place on sentiment data alone. Often times an entire investment thesis and resulting portfolio structure will be based on one or a number of sentiment driven indicators without regard for anything else. A boiling pot of impending disappointment that sends the sentiment driven investor back to the drawing board eventually. Tonight we will look at two sides of the equation. First let's see what market action is telling us here. I'll go over these points in living color during this coming weekend's review: - The Dow Transports, arguably THE leader of the current rally, are exhibiting increasingly sloppy behavior, threatening to move below a key technical point. - Dow Industrials today thrust off of the key trajectory for 2013 pictured here. This is an indication that the market is growing uncomfortable with the slope of the current move. - IWM volume today was the greatest for a down day since September of 2011. It is not just the volume on a down day that is of concern. Perhaps more importantly, it is where that volume surge is occurring. In the case of IWM (Russell 2000) it is occurring right at the key trajectory from the October 2002 lows pictured here. A very significant development indicating that the market is recognizing the importance of a failure at this key trajectory. - The SOX is threatening to fail right at its key trajectory from the 1998 lows for the index. Now let's look at sentiment by looking over the combined put/call ratio using the 20 and 100 day moving averages only: click chart to enlarge If you are confused, then you are right where you should be. The market will also be confused, most likely resulting in choppy sideways action that leads both bulls and bears nowhere throughout the summer months. In this case, the preferred position is leaning towards an...

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WHAT IS THE REAL STORY WITH MARKET SENTIMENT AT THIS JUNCTURE?
Apr17

WHAT IS THE REAL STORY WITH MARKET SENTIMENT AT THIS JUNCTURE?

Measuring sentiment on Wall Street is perhaps the most subjective of all the analytic arts that is practiced on a day to day basis. It is one of the many tools out there that doesn't work until it does. Those who swear by it will be quick to point to the instances when it does as justification for future speculative positions that have no better chance of being correct than using a coin to determine whether to be long or short. Sentiment alone should not be used as the foundation for an investment thesis. You can always tell those who are inexperienced in dealing with sentiment by the level of importance they put on its readings. Those who base an entire investment thesis solely on sentiment are, in nearly every case, using sentiment as a psychological crutch to validate their prevailing bias. The truth about sentiment is that it will tell you whatever you want it to tell you at any given moment. Which is exactly why I choose to ignore sentiment measures, except when considered on the periphery of a strategy that takes into consideration numerous other factors first. During the end of March, I posted analysis showing how to use the put/call ratio (the only sentiment measure I look at consistently) to measure the point at which 5% corrections occur within the context of a bull market. This study solidified my belief that the chances of a 5% correction seeing its beginnings in April were slim to none. May looked like a better time frame to consider for such an event. Now is a good time to look at another measure of the put/call ratio. This time I want to look at a shorter-term measure of both the combined put/call ratio and the equity put/call ratio. The charts below are the 2 and 5 days moving averages for both of these put/calls. I use moving averages only to smooth out the results: click chart to enlarge As the charts above demonstrate, bears remain overly-anxious to regain their sanity through the creation of capital via put buying. Not necessarily what you want to see if you are hopefully bearish on the markets in the months ahead. This type of overzealous bearish investment behavior should not be occurring after such a powerful rally that has propelled the Dow and S&P 500 to all time highs. This leads me to believe that once this option expiration week passes, the markets should regain their footing for the remainder of April. I will reassess the sentiment picture again in...

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