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mortiz

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Reply with quote  #1 
The US market has progressed well so far in the cleansing process providing the 9-month cycle low, but there is a significant missing link, and that is the lack of panic capitulation typically accompanying important price lows.  Here is a review of how some of my favorite money-on-the-table fear/greed indicators are currently postured.

First the weekly Options Clearing Corporation (OCC) Buy-To-Open (BTO) put-call (PC) ratio for the smallest equity options players trading 1 to 10 contracts per transaction.  The OCC includes ETF options volume in its equity options data, which makes this data even more interesting since ETF options have a definite volume skew toward puts.

After exhibiting an increase in opening long positions in puts (relative to calls) the week before last, the smallest equity options players, on balance, renewed their interest in opening long positions in calls last week.  It's always possible the PC ratios posted by this bunch over the past two weeks is sufficient, but it sure doesn't smell like bullish capitulation to me.



The weekly composite retail equity options BTO call-put ratio (all retail transaction sizes) over the past couple of weeks appears to exhibit a tendency of bottom fishing than throwing in the bullish towel.  This chart is a bit messy with the addition of Bollinger bands, but typically the retail BTO call-put ratio (blue curve) will touch the lower gray band curve when an important price low is imminent.  This indicator is just nominally below its 20 week moving average while the Bollinger band width is expanding... not the behavior one would expect to see at important price lows.



The OCC does not publish BTO call and put positions for the equity market makers, but the ratio of market makers' closing of BTO calls and puts does provide insights particularly at price lows.  The market makers' closing of BTO positions' call-put ratio is making good progress toward its lower range which normally accompany price lows, but the lower range has been trending lower over the past year or so, thus one could expect this indicator to slide lower than its current level before the final price low is posted.



The daily all-exchange equity options PC ratio (all traders, all transaction types) finally began rising and is making progress toward the levels typically associated with price bottoms over the past year.  This data is provided by the OCC which includes ETF volume... the largest ETF volume contracts, QQQQ, SPY, and IWM have been removed from this data for providing a "purer" equity options PC ratio.  Note the current blue curve level is high enough to qualify as a price bottom zone relative to levels from 2003 through 2006, but the current equity options PC ratio is significantly below those levels accompanying price lows in 2007... the range of this indicator has been trending higher.



The more popular CBOE only equity options PC ratio is also not yet to the levels associated with major price bottoms.  Keep in mind the CBOE only comprises about 30% of the equity options volume these days. I like to monitor longer term PC ratio moving averages, thus the blue curve is a 20 day moving average and the black curve is a 60 day moving average in this chart.



Next is a comparison of the OEX PC ratio and the CBOE equity options PC ratio.. you may notice when the blue curve reaches its upper range, this tool does a good job of pinpointing price highs, but also coincides with price lows, when it is in its lower range.  Currently, this tool is making good progress in grinding toward its lower range, but will probably need to get closer to the dotted support trend line indicating the OEX traders are getting more bullish while the equity options traders are getting more bearish.



While on the topic of the OEX options trading, the conventional wisdom is the OEX traders are the most savvy of the options players.  A couple of years ago, the OCC began separating the daily OEX put and call volume into three classes: retail traders, brokerage firms, and market makers.  Surprisingly, the brokerage firms are usually insignificant players in the OEX options pit, leaving the market makers battling the retail customers.  The retail customer volume averages about less than 2/3 of the market makers' volume suggesting the market makers are going against one another in several OEX options transactions.

I have experimented with several mathematical permutations of the OEX market maker and retail customer put/call volume, but since the market makers' job is provide liquidity in the options pits, they are often forced to take the opposite side in a contract, a side they may not initiate in their own accounts.  Therefore raw market maker PC ratios are not perfectly consistent in their message.

By subtracting the retail PC ratio from the market maker PC ratio and smoothing the resulting data over a ten day moving average, there is a tendency of price tops accompanying lower range values of the blue curve, while bottoms are formed when the blue curve turns down after reaching its upper range.

Two years of history isn't much, but in most case, when the blue curve rolls over in its upper range and declines back toward, or below the zero line, price bottoms are posted.  I hope to continue experimenting and monitoring this data and will weigh in if anything of interest surfaces.



Two or three years ago, we experimented with an index's options volume and its accompanying volatility index values.  By comparing the the daily index option volume to a 30 day MA, creating a ratio, and conducting the same approach to the volatility data, then multiplying the two ratios together, an indicator dubbed the options volume-volatility "power tool" was born.

Below is the OEX-VXO options power indicator, which reached the buy zone a couple weeks ago and has since rolled over generating a buy signal.  Like any market tool, one should use other indicators for confirmation, and this one is no exception.  Sometimes, the valid buy signal from the power indicator comes on a second spike which is a lower high, which I feel is going to be the case now, but the table is set.  All other power indicator variants I follow (Q4-QQV, SPX-VIX) have carve out similar patterns.



Many readers may be familiar with the liquidity premium (LP) indicator, whose concept was originated by Jason Goepfert, and Tom McClellan has also developed an effective version.  The indicator compares an index's volume against its associated ETF volume.  When the underlying ETF volume becomes excessive relative to the index's volume, the Goepfert version of the LP indicator reaches elevated levels usually accompanying price lows.  The next chart is the NDX-QQQQ LP version which has reached unusually high levels. 

I monitor other LP variants, RUT-IWM, SPX-SPY, and Dow-DIA and although they are getting into the buy zone, none of the others have rocketed to this level. The Q4-NDX variant has rolled over generating a buy signal, but like the previously discussed options volume-volatility power tool, there are often multiple spikes with lower highs when the price bottom is ultimately achieved... again, the table is being set.



The Rydex money market assets percentage of the total Rydex assets continues to suggest there is no urgency in a flight to safety in the Rydex world.  I would look for this indicator to reach the upper dotted trend line for a signal the Rydex traders are getting concerned.



The next indicator has a brief history but we'll take a look anyway.  This is the daily NYSE short sales volume as a percentage of total sell volume.  In early July, 2007, the uptick rule for short selling was eliminated which drastically changed the range of this indicator.  From my observations of this data thus far, it appears to be a "smart money" indicator when prices are nearing a top, since the indicator begins rising.  However, in the few examples we have thus far, price bottoms are accompanied by upward spikes.

A nice upward spike was posted on the first leg of this current decline, but the most recent decline (the past week or so) has not been accompanied by an increasing percentage of short selling on the NYSE.



Another variant of the NYSE daily short selling volume measures the number of deviations from its 50 day mean... this indicator is currently nominally less than its 50 day mean, which in the short history of this data, has not been the level that coincides with sustainable price rallies.



Enough of the sentiment stuff, let's take a look at some breadth indicators of the broad based US common stocks as measured by the "Russell 4000" which comprise the 4000 highest cap US common stocks (R4K) as filtered by the Russell group.

First the R4K cumulative AD line.  After getting stopped in its tracks at its 1% trend (199 day EMA) in October, the R4K AD line is now testing its August 2006 low.  With its 5% trend (39 day EMA) and 10% trend (19 day EMA) both below its 1% trend and in free fall mode, one can see just how sick the current liquidity situation is in the US market.



The R4K AD MCO continues to form an extended complex structure below its zero line with lower highs and lower lows over the past few weeks.  Note the AD MCO extreme in August 2007 sent a message the price lows at that time would be tested, likely violated, in 2 to 4 months.... the rule of thumb associated with such negative MCO extremes.  One would expect the Russell 3000 index (RUA) to take out its August 2006 lows in the coming days/weeks before the 9-month cycle bottoming process is completed.



The R4K AD McSum is only 230 points above it August low... it would be a bullish longer term divergence if RUA were to break the August lows with the R4K AD McSum remaining above its August low.  Note the apex of the McSum triangle is positioned around December 20th.... which is some counts, is the "ideal" 9-month cycle bottom.



For a little longer term look at breadth liquidity indicators is the weekly NYSE common stock only AD MCO.  The price proxy (red curve) is the weekly unweighted NYA index, note that this weekly price measure has broken its August 2007 lows while the weekly common stock AD MCO is comfortably above its August 2007 low... if this bullish divergence can hold in the coming weeks, it will bode well for the longer term once the 9-month cycle bottoming process is completed.



The weekly NYSE common stock cumulative AD line has now confirmed the weekly unweighted NYA price breach of its August 2007 low, by taking out the August 2007 weekly NYSE common stock AD line low.  Note the weekly common AD line is have a lot of trouble with its 5% trend (39 week EMA).  It is crucial the weekly common stock AD line rises back above its 5% trend and remains above it following the 9-month cycle completion.



Now some daily CLX related indicators.  The NDX CLX MCO, like the NDX price, has not breached its early November 2007 low, thus the setup for a positive divergence remains intact if the NDX does take out its recent price low.



The NDX AYDIS MCO is on the verge of breaking its recent low, which would not be a bullish event.  The AYDIS is the difference between CLX and the CLXpp variant.  When AYDIS is negative, it means the CLXpp variant is stronger than CLX, which means the price advance attempts are accompanied by small price increases in the majority of the NDX components... a thorough explanation of CLXpp and its relationship with CLX, will be for another time.



The NDX CLX 10 day and 30 day offsets are currently supportive of a price rally, but this indicator is not always reliable... like many tools.



The Dow CLX MCO has been positively diverging with the Dow, but has been in a tight congestion zone for several days.  The fact the Dow CLX MCO has not broken down with the Dow declining most of the past week is encouraging for the bullish case, but such congestion patterns usually resolve in the MCO falling south out of the congestion.



The Dow AYDIS MCO has been diverging positively and rising against a falling Dow, which is a good sign for the bullish case and suggests time is running short for the bears to keep their grip upon the Dow.



Like the NDX 10 and 30 day offsets, the Dow offsets are in a bullish supportive configuration for the next five trading days... however, I do not want to bet the farm on this indicator alone a sustained rally is in the cards.



In summary, there are some encouraging internals' divergences being developed, particularly with the Dow, which will likely lead the initial thrust out of the 9-month cycle low.  However, although this time could be different, it is hard to accept the possibility of the 9-month cycle low is now behind us with the glaring lack of trader/investor panic over the past couple weeks, as measured by several money-on-the-table sentiment indicators.... should be an eventful few weeks coming.

The McClellan timing model, which has been very effective the past few months, has a cluster of bottoming signals this next week, and another cluster of bottoming signals appearing on the radar screen just before Christmas, so the bears' time in the driver's seat will soon be over, and time for the bulls to take the reins.

FWIW

Randy
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doc

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Reply with quote  #2 
Randy,

Thanks for another great review of you unique data.

I've reviewed each chart and as best as I can tell, some but not all, of the sentiment tools you've presented seem to reach the extremes often seen at bottoms a week or two after the price lows in many cases, though this is hard to see with certainty on the longer term charts you have shown.

It is almost as though conditioning has taken place with the preceding price drops, such that the ensuing rally off THE lows is soon met with another wave of bearish bets, marking the sentiment lows a slight bit after the price lows. I'm just saying, what are the odds right now that any rally over the next several days will be met with skepticism and disbelief.

Doc
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mortiz

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Reply with quote  #3 
Doc,

If a wave of shorting activity comes forth in the expected reflex rally this week or next (at the latest), then any such "short the pop" tendency will change my outlook.  Due to the holiday shortened session last Friday, and the absence of many players, the lack of heavy shorting Friday (options or stocks) will carry little weight in my analysis.  If low PC ratios or stock shortselling percentages decrease/stay flat on an upmove this week, then I would be prone to go with capitulation sell off scenario.

This time could be different, but I haven't detected the panic normally seen at important price lows yet, i.e. some of the data discussed in this thread nor the phone calls and mails I usually get from friends and family when they are concerned about their portfolios taking a paper bath.

Thanks for the feedback!

Randy
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doc

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Reply with quote  #4 
Randy,

Understood. One close acquaintence of mine sold everything last Wed. She generally does not time the market and is typically a "buy and hold" investor.

Doc
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