The
anecdotal evidence of pessimism has really piled up.
Mainstream articles about massive mutual fund flows into bonds
instead of stocks, firms tripping over themselves to roll out "fat
tail" funds (and sovereign funds looking to invest in them), and
celebrities warning about pending market crashes and advising the
masses to stay away from stocks.
Until
recently, much of that attitude hadn't been reflected in many of
our indicators. But it's starting to.
Yesterday we saw that traders in the Rydex family of mutual funds
have pulled a large amount of money from the funds that bet on
leveraged upside in stocks.
Now,
we can see that investors have turned quite bullish on two
currencies that tend to benefit when fear rises to abnormal
levels.
When
both "fear trade" currencies, the Swiss Franc and Japanese Yen,
have Public Opinion scores greater than 75%, it has tended to
coincide with periods of above-average performance going forward
for the S&P 500.
The
table below shows the S&P's returns in the weeks and months
after other days when investors were uber-bullish on both
currencies. The returns encompass 43 trading days, which
really covers 7 distinct time periods from 1994 - current.
1 Week
Later
2 Weeks
Later
1 Month
Later
3 Months
Later
Avg Return
1.7%
2.0%
3.9%
6.7%
% Positive
79%
81%
100%
88%
Max Loss
-0.8%
-0.9%
-0.9%
-2.9%
Max Gain
2.5%
3.3%
5.0%
9.4%
We can
see that even in the short-term, it tended to lead to above-average
performance for stocks. By a month later, a remarkable 100%
of the days showed a positive return, and the risk/reward was
impressively skewed to the "reward" side for buyers.
It
wasn't necessarily a long-lasting signal, though. As we can
see in the chart above, all three of the previous signals ended up
rolling over and leading to negative returns eventually, but during
the sweet spot of up to a month later, stocks recovered fairly
well.
Perhaps not coincidentally, those last three signals also coincided
with a bottom in 10-Year Treasury yields, another benefactor of the
"fear trade" recently. It jumped an average of about 60 basis
points, so fairly notable moves. It will be interesting to
see if we get it again.
On the Yen, retail investors are net long 50k contracts as of
last Friday. This level of net long positions has typically led to
some form of retracement in the Yen
I started to scale into long USDJPY positions this week and
coupled with divergence on the currency chart, it makes for me a
good risk reward trade
So what you state is another good reason to either expect
S&P strength and/or JPY weakness in the coming weeks
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another....
Posted by marketguy on 26th of Aug 2010 at 08:05 pm
from Sentimentrader:
Public Opinion - Swiss FrancAnd Japanese Yen
The anecdotal evidence of pessimism has really piled up. Mainstream articles about massive mutual fund flows into bonds instead of stocks, firms tripping over themselves to roll out "fat tail" funds (and sovereign funds looking to invest in them), and celebrities warning about pending market crashes and advising the masses to stay away from stocks.
Until recently, much of that attitude hadn't been reflected in many of our indicators. But it's starting to.
Yesterday we saw that traders in the Rydex family of mutual funds have pulled a large amount of money from the funds that bet on leveraged upside in stocks.
Now, we can see that investors have turned quite bullish on two currencies that tend to benefit when fear rises to abnormal levels.
When both "fear trade" currencies, the Swiss Franc and Japanese Yen, have Public Opinion scores greater than 75%, it has tended to coincide with periods of above-average performance going forward for the S&P 500.
The table below shows the S&P's returns in the weeks and months after other days when investors were uber-bullish on both currencies. The returns encompass 43 trading days, which really covers 7 distinct time periods from 1994 - current.
1 Week
Later
2 Weeks
Later
1 Month
Later
3 Months
Later
We can see that even in the short-term, it tended to lead to above-average performance for stocks. By a month later, a remarkable 100% of the days showed a positive return, and the risk/reward was impressively skewed to the "reward" side for buyers.
It wasn't necessarily a long-lasting signal, though. As we can see in the chart above, all three of the previous signals ended up rolling over and leading to negative returns eventually, but during the sweet spot of up to a month later, stocks recovered fairly well.
Perhaps not coincidentally, those last three signals also coincided with a bottom in 10-Year Treasury yields, another benefactor of the "fear trade" recently. It jumped an average of about 60 basis points, so fairly notable moves. It will be interesting to see if we get it again.
On the Yen, retail investors
Posted by vimal on 27th of Aug 2010 at 03:45 am
On the Yen, retail investors are net long 50k contracts as of last Friday. This level of net long positions has typically led to some form of retracement in the Yen
I started to scale into long USDJPY positions this week and coupled with divergence on the currency chart, it makes for me a good risk reward trade
So what you state is another good reason to either expect S&P strength and/or JPY weakness in the coming weeks