Tuesday, September 2, 2014

Market Vane Bullish Consensus

www.CartoonStock.com

Most recently the current investor sentiment got a lot of press around the blogosphere, regularly picking out the rapid increases in bullish sentiment and it’s potential (or probable) negative (contrary) implications for the market’s short- and intermediate term performance.

For example: The American Association of Individual Investors (AAII) sentiment survey rose from 20.7% bulls on August 26, 2010  – there were only 22 lower readings ( = 2.04%) out of 1078 weekly reports since 1990 – to 50.9% bulls three weeks later (as of September 16, 2010) – there were only 148 higher readings out of 1078 weekly reports since 1990). The AAII sentiment survey measures the percentage of individual investors who are bullish, bearish, and neutral on the stock market for the next six months.

But what really caught my eye was the fact that during the last six weeks the Market Vane Bullish Consensus was steadily improving, and last week’s bullish consensus of 54% marked the 5th consecutive higher (weekly) reading (bullish consensus for the last 6 weeks: 54% | 53% | 50% | 48% | 43 % | 42%). The Market Vane Bullish Consensus is compiled daily (but is available on a weekly basis as well) by tracking the buy and sell recommendations of leading market advisers and commodity trading advisers (CTA) relative to a particular market (in this event the stock market), and reflects the open positions of the advisers and CTAs as of that day’s market close.

As Rennie Young from MarketTells already showed, this group is regularly on the right side of the market, and consecutive readings above | below the 50% mark do more often have positive | negative implications for the market’s intermediate- and long-term performance (but not necessarily over the short-term).

In order to check if a steady increase in the Market Vane Bullish Consensus (independently from the then current percentage-wise absolute level, like above or below the 50% mark) had positive or negative implications – or none at all – in the past, I checked for the following setups:

  • Strat. #1 MV+ >= 2 w.‘: (the weekly) Bullish Consensus rose 2 or more weeks in a row,
  • Strat. #2 MV+ >= 3 w.‘: (the weekly) Bullish Consensus rose 3 or more weeks in a row,
  • Strat. #3 MV+ >= 4 w.‘: (the weekly) Bullish Consensus rose 4 or more weeks in a row, and
  • Strat. #4 MV+ >= 5 w.‘: (the weekly) Bullish Consensus rose 5 or more weeks in a row.

Table I below shows the SPY‘s (S&P 500 SPDR) historical performance (since 01/01/1990) over the course of the then following 1 up to 63 sessions (approx. 3 months) with respect to those setups listed above, assumed one went long on close of the last session (regularly the Friday) of the respective week (the week showing the xth consecutive higher reading).


(* no close below trigger day’s close during next 5 sessions)

Interestingly, the longer the streak of consecutive higher (weekly) readings in the Market Vane Sentiment Survey the better the market’s chance for closing at a higher level 1, 2 and 3 months later. Since 1990, there were 11 occurrences where the weekly Market Vane Sentiment Survey posted 5 (or more) consecutive higher readings, and the market (SPY) was invariably trading at a higher level 2 and 3 months later.

Table II below shows all historical occurrences (since 1990) and the market’s performance over the course of the then following 5 , 10 , 21 (regularly 1 month later), 42 (approx. 2 months later ) and 63 sessions (approx. 3 months later).

(* no close below trigger day’s close during next 3 months)

In addition, and applicable to all of those 11 occurrences (in 2007 the Bullish Consensus posted a streak of 8 consecutive higher readings, 4 of them are listed above) historically downside potential was non-existent over the course of the then following 3 months. The SPY was never trading lower than -2.91% below the trigger day’s close over the then following 3 months on any of those 11 occurrences, while it was trading higher 10% or more on 4 occurrences.

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In order to verify if the Market Vane Sentiment Survey‘s quality of forecast on the bullish side would be confirmed by the bearish side as well, I checked for those occurrences where the

  • Strat. #1 MV- >= 2 w.‘: (weekly) Bullish Consensus declined 2 or more weeks in a row,
  • Strat. #2 MV- >= 3 w.‘: (weekly) Bullish Consensus declined 3 or more weeks in a row,
  • Strat. #3 MV- >= 4 w.‘: (weekly) Bullish Consensus declined 4 or more weeks in a row, and
  • Strat. #4 MV- >= 5 w.‘: (weekly) Bullish Consensus declined 5 or more weeks in a row.

Table III below shows the SPY‘s (S&P 500 SPDR) historical performance (since 01/01/1990) over the course of the then following 1 up to 63 sessions (approx. 3 month) with respect to those setups listed above, assumed one went long on close of the last session (regularly the Friday) of the respective week (the week showing the xth consecutive lower reading).

Although to a lesser degree than on consecutive higher readings, leading market advisers and commodity trading advisers (CTA) seemed to be again more often on the right (in this event the downside) of the market. After posting at least 4 consecutive lower (weekly) readings in the past (21 occurrences), the SPY was trading at a higher level 42 (approx. 2 months) and 63 sessions (approx. 3 months) later only 47.62% and 52.38% of the time, (significantly) lower than the market’s at-any-time (random) chance of 62.81% and 65.49% for trading higher 42 and 63 sessions later.

Conclusions:

On top of positive seasonalities like being up year-to-date at the end of September ( see As September goes, so goes … ), special situations like the recent clustering in POMO days ( Permanent Open Market Operations (POMO) ), the recent steady increase in the Market Vane Bullish Consensus (5 consecutive higher weekly readings) additionally supports the positive outlook with respect to the stock market’s performance for the remainder of the year.

By posting at least 5 consecutive higher weekly readings, the Market Vane Bullish Consensus does what it says on the tin: A consensus on the bullish side of the market, remarkably confirmed in the past.

Successful trading,

Frank

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Remarks: Due to their conceptual scope – and if not explicitely stated otherwise – , all models/setups/strategies do not account for slippage, fees and transaction costs, do not account for return on cash and/or interest on margin, do not use position sizing (e.g. Kelly, optimal f) – they’re always ‘all in‘ – , do not use leverage (e.g. leveraged ETFs) – but a marginable account is mandatory – , do not utilize any kind of abnormal market filter (e.g. during market phases with extremely elevated volatility), do not use intraday buy/sell stops (end-of-day prices only), and models/setups/strategies are not ‘adaptive‘ (do not adjust to the ongoing changes in market conditions like bull and bear markets).

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Disclaimer

The information on this site is provided for statistical and informational purposes only. Nothing herein should be interpreted or regarded as personalized investment advice or to state or imply that past results are an indication of future performance. The author of this website is not a licensed financial advisor and will not accept liability for any loss or damage, including without limitation to, any loss of profit, which may arise directly or indirectly from use of or reliance on the content of this website(s). Under no circumstances does this information represent an advice or recommendation to buy, sell or hold any security.

I may or may not hold positions for myself, my family and/or clients in the securities mentioned here. Actions may have been taken before or after information is presented, and any opinions expressed in this site are subject to change without notice.

(Data courtesy of MetaStock , and for data import, testing, surveys and statistics I use MATLAB from MathWorks)

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