Professional Documents
Culture Documents
Capital Research
Leave a comment
Archive
Headlines
1 Traders have been selling high-yield junk bond funds heavily, including the most
popular exchange-traded funds. That has pushed the market price on these funds to
more than 1% below the value of their underlying securities, a rarity for ETFs. See
page 2.
2 Since the inception of S&P 500 futures, they have lost more than -1% during the
week of December option expiration only 1 time out of 32 years. The average return
is +1.1%, with an average drawdown (i.e. maximum loss) of -0.7% versus an average
maximum gain of +2.1%, a 3-to-1 reward-to-risk ratio. If Monday of expiration week
closed lower (like it did on Monday), then the rest of the week was positive 8 out of 9
times, averaging +1.9%.
Stocks Intermediate-Term
Risk has declined back to neutral
after rising to above-average
levels on December 4, with the
huge increase in uncertainty
being the main factor
Bonds
The Optimism Index for bonds
has pushed into extreme territory
for the first time since mid-2012,
suggesting a rise in yields is
becoming more likely
Gold
Optimism is in extreme
pessimism territory, but has a bit
to go before matching extremes
from the past year
1900
70%
1700
60%
1500
50%
67%
60%
1300
1100
40%
900
Jason Goepfert
President
jason@sentimentrader.com
30%
700
Smart Money
20%
12/17/13
Dumb Money
S&P 500
500
3/17/14
6/17/14
9/17/14
The data and analysis contained herein are provided as is and without warranty of any kind. Sundial Capital Research, Inc., its employees, or any
third-party data provider, shall not have any liability for any loss sustained by anyone who has relied on the information contained in any publication
published by Sundial Capital Research, Inc. No report shall be considered a solicitation to buy or sell any stock or security. This communication reects
our opinions as of the date of this communication and will not necessarily be updated as views or information change. Sundial Capital Research, Inc.
and its respective employees may have lpositions in the securities discussed herein and may purchase or sell such securities without notice. The
information contained herein is believed to be accurate to the best of our knowledge, and we make no guarantees that there will not be errors from
ourselves or third-party data providers. We make every effort to validate data integrity, but occassionally errors do occur and we subsequently make an
effort to disclose that to subscribers. Further distribution prohibited without prior permission.
Copyright 2014 (c) Sundial Capital Research, Inc. All rights reserved.
Page 1 of 14
-1% Discount
Late last week, we took a look at the "triple time frame" rate
of change in high-yield (junk) bonds, which was showing one
of the most severe bouts of selling pressure in 30 years.
When we see sharp dislocations like this, it makes the job of
arbitrageurs more difficult. Some love it because it creates
opportunities for large gains; others loathe it because it
makes their daily cash flow unpredictable.
One of the favorite targets of arbitrageurs is closed-end
funds. Driven by retail investors, the market price of closedend funds often drifts from the value of the underlying assets
held by the fund. An arbitrageur can buy the fund at its
market price, then hold it and wait for the market to catch up.
There is still risk involved because the underlying assets
could deteriorate, but buying the assets at a discount
provides the investor with a tailwind and a greater chance of
a positive return than if they had bought the assets at fair
market value.
With exchange-traded funds, arbitrageurs don't have as
much opportunity because of how the funds are priced and
Page 2 of 14
15-Sep-2008
23-Feb-2009
7-Jul-2009
4-Feb-2010
5-May-2010
16-Jun-2011
4-Aug-2011
23-Nov-2011
17-May-2012
31-May-2013
19-Aug-2013
12-Dec-2014
Median
All Days
# Up
# Down
Relevance
1 Day
Later
-2.3%
1.4%
0.6%
-0.6%
-2.5%
1.1%
-0.1%
0.0%
0.0%
-0.1%
0.9%
1 Week
Later
0.2%
-4.6%
1.9%
-1.8%
0.4%
2.3%
-1.3%
5.1%
0.9%
-0.1%
1.5%
2 Weeks
Later
-10.6%
-9.7%
6.5%
1.5%
-1.7%
3.9%
-1.0%
5.7%
-0.7%
0.4%
1.0%
1 Month
Later
-12.4%
1.5%
11.4%
3.6%
-2.8%
4.0%
0.7%
8.8%
2.6%
-1.2%
3.7%
3 Months
Later
-24.3%
15.1%
14.7%
1.1%
4.3%
0.8%
3.1%
13.0%
6.3%
-0.1%
5.2%
6 Months
Later
-20.1%
26.5%
23.4%
8.1%
8.8%
2.5%
8.2%
10.4%
7.4%
3.5%
7.5%
1 Year
Later
6.9%
38.6%
25.4%
16.4%
15.3%
9.3%
13.3%
19.8%
16.7%
8.2%
11.1%
0.0%
0.0%
4
6
11%
0.4%
0.1%
7
4
30%
0.4%
0.3%
6
5
5%
2.6%
0.6%
8
3
71%
4.3%
2.0%
9
2
53%
8.1%
4.1%
10
1
73%
15.3%
10.0%
11
0
95%
Relevance above 95% suggests statistical significance; the higher the %, the more robust the result
@ Sundial Capital Research, Inc. sentimenTrader.com
Page 3 of 14
Active Studies
Stocks
Date
18-Nov-2014
17-Nov-2014
14-Nov-2014
31-Oct-2014
30-Oct-2014
2-Oct-2014
8-Jul-2014
9-May-2014
16-Apr-2014
19-Feb-2014
Description
Priority
Low
Low
Medium
Medium
Medium
Medium
Low
Medium
High
High
Bias
Bullish
Bearish
Bullish
Bullish
Bullish
Bullish
Bullish
Bullish
Bearish
Bullish
Priority
Medium
Medium
High
Medium
Bias
Market implication
Bearish
Bullish
Bullish
Bullish
Other Markets
Date
8-Dec-2014
5-Dec-2014
13-Nov-2014
3-Nov-2014
Description
The Active Studies highlight studies we've discussed in prior reports that are still "active". This means that the market is
still within the time frame that was indicated as being effective, meaning it showed returns or consistency that was
significantly different than random during the study period. For some studies, there was not a concrete time frame given,
but rather general market conditions. The study would remain "active" as long as those market conditions were in effect.
Page 4 of 14
Low risk
(0)
High risk
(10)
Bottom Line: Odd readings continue in this market. The VIX "fear gauge" declined more than
-3% despite more than a -0.5% loss in the S&P 500, the first time this has happened on any
day other than a Friday (traders often reprice options on Friday to account for time decay
during weekends). When it has happened (again, only on Fridays), the S&P 500 rose over the
next three days 21 out of 28 times. One of the most seasonally positive times of the year
begins now, though that is always only a tertiary consideration. More importantly, there are
numerous signs of excessive pessimism on a shorter-term time frame, with the Optix at 25 and
confirmed by a variety of other measures, so risk has declined again.
Page 5 of 14
Low risk
(0)
Bottom Line (Updated 12/12/14): The last update from December 4 raised the risk level to
slightly above-average due to a number of overly-optimistic readings. Now that stocks have sold
off, and more importantly we've seen a spike in uncertainty, that risk has decreased back to
normal levels. The way things are going, it may not take much more to trigger below-average
risk on a 1-3 month time frame. As always we will monitor that on a day-by-day basis.
High risk
(10)
Page 6 of 14
Re-Test
BeliefBuilding
Phase
WE ARE HERE
Lower Probability
Lower Low
(3%-8% decline)
BeliefBuilding
Phase
Fear-Building Phase
(More than 8% decline)
WE ARE HERE
Highest Probability
WE ARE HERE
Lowest Probability
Explosive Rally 3
Maximum
Pessimism
Re-Test 2
BULL PHASE
CORRECTION
BEAR PHASE
CORRECTION
BULL PHASE
The Typical Sentiment Cycle is a real bull-to-bear phase from the S&P 500 in 1966. It displayed the classic price
phases that many cycles exhibit. The WE ARE HERE box is a partially subjective judgment based on sentiment
conditions, price behavior and fundamental ratios. It should proceed forward the majority of the time, but may skip
backward as new information becomes known. These are rough approximations only.
The case against using something like this is that every cycle is different. No two markets ever look exactly the
same, or exactly like this. Sometimes, like the mid-1990s, the middle phase just keeps going and going and going.
More typically, stocks spend 1-3 months in each phase, though there is wide variation in that, from weeks to years.
Note that "maximum optimism" and "maximum pessimism" normally occur before a market peak and market trough,
respectively. It's rare for bull phases to end when optimism is at its highest point. The same goes for bear phases,
but that is less consistent - sometimes a bear will end in panic and both price and sentiment will bottom at the same
time.
1 What to watch for: Divergences with breadth figures; "This time is different" articles; arrogance from bullish commentators; proliferation of new
types of funds; closing of long-time funds that are not fully invested.
2 What to watch for: Divergences with breadth figures, doomsday prophesies on mainstream media, stocking up of staples among consumers,
heavy trading activity, ridicule of "knife catching" buyers.
3 Watch to watch for: Explosive price gains over 2-3 day periods; massive thrusts in market breadth; "Just another bear market rally" articles;
minimal pullbacks after short-term overbought readings
Page 7 of 14
Short-Term
Excess
Pessimism
Optix
Intermediate-Term
Excess
Optimism
25
Volatility
Excess
Optimism
48
Optix
40
40
Volatility
45
Options
Pressure
Excess
Pessimism
50
Options
35
45
Breadth
Oscillator
40
Surveys
TICK
40
C.O.T.
85
50
55
Shorts
Cash
Insiders
Rydex
80
45
95
% Of Indicators At An Extreme
50%
--- S&P 500
40%
30%
25%
20%
19%
10%
@ Copyright sentimenTrader.com
0%
06/19/14
07/19/14
08/19/14
09/19/14
Page 8 of 14
10/19/14
11/19/14
Indicators Showing
Excess Optimism
Equity PutCall
IPOs
ISE Sentiment Index
Mutual Fund Flow (No ETFs)
New High / New Low - NYSE
Odd Lot Shorts
OEX PutCall
Risk Appetite Index
Rydex Beta Chase Index
Rydex Bull/Bear Spread
Secondary Offerings
Short-Term Optix
TICK - NYSE
Up Issues - NYSE
Up Volume - NYSE
VIX
VIX Term Structure
Page 9 of 14
Chart
55 100
Basic Materials
48
50
80
90
350
Biotechnology
70
300
80
45
70
60
40
50
250
70
60
200
50
35
40
30
30
20
150
40
30
100
20
25
10
XLB Optix
0
Nov-13
XLB
IBB Optix
20
Feb-14
100
90
May-14
Aug-14
Nov-14
0
Nov-13
90
72
65
IBB
0
Feb-14
75 100
Consumer Discretionary
80
May-14
Aug-14
Nov-14
55
Consumer Staples
54
50
80
70
55
60
45
70
60
50
45
40
40
50
35
40
35
30
30
20
25
10
30
20
25
10
XLY Optix
0
Nov-13
XLY
15
Feb-14
100
90
50
10
May-14
Aug-14
Nov-14
XLP Optix
0
Nov-13
20
Feb-14
105 100
Energy
47
95
80
90
XLP
May-14
Aug-14
Nov-14
30
Financials
66
25
80
85
70
70
75
60
50
40
65
50
55
40
30
20
60
15
10
30
45
20
20
35
10
XLE Optix
0
Nov-13
XLE
XLF Optix
25
Feb-14
May-14
Aug-14
10
Nov-14
0
Nov-13
Page 10 of 14
XLF
0
Feb-14
May-14
Aug-14
Nov-14
75
Health Care
62
90
100
64
90
65
80
36
Housing
34
80
32
70
55
60
70
30
60
50
45
40
50
28
40
26
35
30
30
24
20
25
10
XLV Optix
0
Nov-13
100
90
May-14
Aug-14
XHB Optix
Nov-14
70
Industrials
XHB
20
Feb-14
100
May-14
Aug-14
Nov-14
45
Technology
71
60
80
50
70
60
40
40
70
60
35
50
50
30
40
30
20
40
30
30
20
20
10
10
XLI Optix
0
Nov-13
Feb-14
May-14
Aug-14
Nov-14
44
47
80
70
42
60
50
XLK
20
Feb-14
May-14
Aug-14
Nov-14
22
32
30
20
10
XLU Optix
XLU
Aug-14
27
40
0
Nov-13
37
May-14
10
52
Utilities
Feb-14
25
XLK Optix
XLI
0
100
0
Nov-13
0
Nov-13
90
42
80
90
22
10
XLV
15
Feb-14
20
Nov-14
Page 11 of 14
Countries Ranked By
Lowest - Highest Optimism Index
23
Russia
Mexico
UK
Canada
Japan
Australia
Brazil
India
Spain
Emerging Markets
Italy
Germany
China
United States
France
33
41
42
42
44
47
48
53
54
54
55
55
61
62
64
66
68
70
71
72
13
21
30
35
35
38
38
38
41
41
43
50
51
52
55
Interactive List
Interactive List
Industries Ranked By
Lowest - Highest Optimism Index
Stocks Ranked By
Lowest - Highest Optimism Index
Holding Companies-Divers
25
Storage/Warehousing
27
Cullen/Frost 10
Trucking&Leasing
28
Machinery-Constr&Mining
Valmont Inds 7
32
Home Builders
Windstream Holdi 10
36
Coal
38
Iron/Steel
39
Metal Fabricate/Hardware
Entertainment
Machinery-Diversified
Transocean Ltd 12
Now Inc
13
Rayonier Adv
13
43
14
44
Liquidity Servic
14
41
54
Prudentl Finl
81
Lodging
55
Prologis Inc
81
Cosmetics/Personal Care
55
Mohawk Inds
82
Office Furnishings
56
On Assignment
82
56
Boston Propertie
83
58
84
Airlines
58
Delta Air Li
84
Advertising
58
Facebook Inc-A
85
Biotechnology
58
Viad Corp
86
REITS
Semiconductors
Real Estate
Textiles
Pericom Semicond
61
94
Interactive List
Page 12 of 14
Currency Futures
Grain Futures
British Pound
26
Corn
Canadian Dollar
25
Soybeans
Euro
38
27
55
Wheat
21
23
Swiss Franc
U.S. Dollar
80
17
Japanese Yen
Soft Futures
Cocoa
47
Coffee
Cotton
Energy Futures
Crude Oil
Heating Oil
43
20
Lumber
44
50
Orange Juice
24
Sugar
11
Natural Gas
Unleaded Gas
Excess
Optimism
Excess
Pessimism
Excess
Optimism
24
31
21
Meat Futures
Cattle
Metal Futures
Copper
Gold
25
29
Silver
Platinum
60
34
Hogs
42
30
Bond Futures
Eurodollar
25
2 Year
25
50
5 Year
38
10 Year
50
30 Year
Bond ETFs
72
TLT
56
BND
37
HYG
JNK
LQD
29
45
Interactive List
Page 13 of 14
Disclosures
The data and analysis contained herein are provided as is and without warranty of any kind. Sundial Capital Research, Inc., its
employees, or any third-party data provider, shall not have any liability for any loss sustained by anyone who has relied on the information
contained in any publication published by Sundial Capital Research, Inc. No report shall be considered a solicitation to buy or sell any
stock or security. This communication reects our opinions as of the date of this communication and will not necessarily be updated as
views or information change. Sundial Capital Research, Inc. and its respective employees may have lpositions in the securities discussed
herein and may purchase or sell such securities without notice. The information contained herein is believed to be accurate to the best of
our knowledge, and we make no guarantees that there will not be errors from ourselves or third-party data providers. We make every effort
to validate data integrity, but occassionally errors do occur and we subsequently make an effort to disclose that to subscribers. Further
distribution prohibited without prior permission.
The Correction Risk Level is a quick way to gauge what our indicators and studies are suggesting. The higher the risk, the more likely the
market is to decline. Another way to look at it is in terms of cash. If the Correction Risk Level is 0, then we would be more inclined to keep
0% of our portfolio in cash (i.e. we would be fully invested). But if the Correction Risk Level is 10, then we would be more inclined to keep
100% of our portfolio in cash (i.e. no exposure to stocks).
In both cases, we take the overriding trend of the market into account. If the indicators are showing excessive amounts of bearish opinion,
then the market is more likely to respond favorably to that if we're in a bull market, and the Correction Risk Level would be lower. But if
we're in a bear market, then bearish sentiment extremes are less reliable, and the Correction Risk Level would be a bit higher.
We take our studies into account as well. So if the indicators are murky, but we have some very compelling studies suggesting the market
should rally, then the Correction Risk Level might be lower than the indicators would suggest.
The default Correction Risk Level is 5, which is where it would be if there is no edge present among our indicators and studies.
We do not suggest using these Correction Risk Levels in any kind of mechanical way. They are meant to help support any existing
technical or fundamental research you may be doing. When the Correction Risk Level is very high, though, we do recommend backing off
on long positions or possibly considering short positions (especially during a bear market). For both time frames, aCorrection Risk Level
below 3 can be considered "low risk" while a level above 7 can be considered "high risk". The more extreme the Correction Risk Level, the
more likely the market will respond in a timely manner.
The most likely time for these Correction Risk Levels to fail is during a time of trend transition from a bull to bear market (or bear to
bull). That is often good information in itself - if the Correction Risk Level is very high, for example, but prices continue to rise, then that is a
heads-up that buyers are very interested, and we will likely see even higher prices going forward.
Risk
Avg
Risk
Avg
Level
Return
Positive
Gain
Level
Return
Positive
Loss
Gain
1.6%
64%
-6.0%
8.6%
7.3%
100%
-0.2%
8.3%
3.8%
62%
-3.5%
6.6%
2.3%
73%
-1.4%
2.5%
5.3%
77%
-3.5%
7.4%
0.1%
52%
-1.4%
1.5%
5.4%
70%
-5.3%
8.2%
1.0%
70%
-1.0%
2.0%
2.7%
63%
-3.6%
4.8%
0.3%
56%
-1.1%
1.1%
2.6%
65%
-4.7%
5.8%
0.4%
59%
-0.8%
1.1%
1.5%
56%
-5.6%
4.8%
0.4%
66%
-0.7%
1.1%
1.1%
58%
-5.2%
5.0%
0.3%
57%
-1.4%
1.7%
0.8%
54%
-3.8%
4.0%
-6.9%
25%
-11.9%
3.5%
10
10
-4.0%
39%
-12.3%
2.8%
Page 14 of 14