In our last submission, I said that it was likely to take at least a couple more weeks to get enough data to get some clarity on the coronavirus and that, at that point, the market would likely have either begun bottoming or have overshot the mark and begun a sharp rally. We were seeing some Buy signals, including one from the Relative VIX, but I feared that the market would not respond to this spectacular set-up immediately. Worse, other reliable measures of Investor Sentiment, like NAAIM and AAII, simply were not showing anything near the type of pessimism we would expect after such a devastating drop. I was fairly sure that if we were to get enough fear and pessimism, it would not matter what the news was because the worst case would have been fully and excessively discounted. The bad news was that we were not near that point.
In the intervening days, the sentiment did improve dramatically. The Relative VIX went to record levels, in fact, as the market fell into a low.
NAAIM median exposure fell to just 10% before bouncing modestly to 15%. That is at levels I associate with bottoms.
AAII showed a marked increase in Bearishness, though there were more Bulls than I might have liked. Still, 52% Bears is supportive of higher prices and we got them.
More currently, despite a 20% rally off the lows, there appears to be copious numbers of Bears on social media, with record levels of shorting and hedging in the SH (the Short S&P ETF) and 21-day cumulative net new shorting at $1.015 BILLION, along with 7-day cumulative net new shorting at $347MM, which is well above my "Buy" level. This suggests that a lot of people are trying to short for the next leg down.
Despite such a quick and dramatic rally, which turned my trend and breadth indicators positive, I perceive far too many shorts and far too high options premiums to confidently call a top. In fact, it's quite possible that the market could rally on another 10%. News could drive the market easily in either direction, and normal volatility may be just a fond memory, but, near-term, the odds favor higher prices. Will we see new lows later? This is possible, certainly. But we are in totally undiscovered territory. It's also just as possible that the low is in and that the Bear Market is over (this would take quite some time to confirm technically). Now is the time to remain flexible and carefully control position size.
Have a prosperous week!
Mark Steward Young
Wall St. Sentiment