Hello Slopers – Mole here from Evil Speculator.
The following post was actually written on Thursday morning during which I was blissfully ignorant of the deep hurting experienced globally and on the index futures side. The reason I'm re-posting those charts here is that I believe the ISEE data collected and put into proper context is incredibly accurate and should prove to be extremely valuable going forward.
Okay, so I lied. I was planning to completely forget about trading during the long Thanksgiving holiday but then I ran into this chart this morning and just couldn't help myself:
This is the equities only portion of the ISEE chart. In response to some of the pitfalls in the traditional put/call ratio the International Securities Exchange (ISE) publishes their own modified version called the ISEE index. Unlike the old school p/c ratio the ISEE filters out trades from both market makers and broker/dealers. The ISEE further differentiates itself by using only opening long trades in it's tabulations.
As such the ISEE presents a much clearer picture of how retail options traders are positioned. The ISEE also uses a different equation than the regular p/c in calculating their index. To formulate the ISEE, the exchange takes the modified call volume, divides it by the put side and then multiplies the result by 100. Hence the ISEE is always a whole number.
With a normalized p/c equation a higher reading symbolizes greater put activity to calls while the ISEE formula generates higher readings if call buyers outweigh put buyers. So while a traditional p/c ratio of .75 would mean more puts than calls an ISEE value of 75 is the exact opposite. Like the CBOE the ISE also offers updated calculations of their p/c index several times an hour.
Okay, now that we're all on the same page you might get an idea where I'm going with this. The high spikes I highlighted mark extreme ISEE readings above 230, which just so happen to precede turning points by a few days. Now, let's correlate these spikes with daily candles on the SPX:
As you can see the ISEE spikes precede turns by a few days, but they are very reliable. Hey, I prefer a few days early than a few days late. What's particularly notable is the 247 reading last Tuesday, which is the highest as far as I can see back. It was followed by a 241 close on Wednesday, which would be a strong reading on its very own. So, chances are that a significant market decline is imminent, and it is most likely only a few days away [again, I had no idea what was happening while I was typing this – LOL]
We now again find ourselves at highly overbought conditions coupled with wide-spread divergences across various averages. Gold and other precious metals were up, with oil and natural gas down as well as the dollar down. The inverse correlation between the dollar and equities are beginning to soften as new extreme down moves in the buck are not accompanied by equally strong up moves in equities. I think Chris Carolan said it best:
"The accelerating nature of the dollar decline and gold rally may finally have reached the point where any international earnings positives for stocks are outweighed by the downside of the obvious increasing monetary instability. The markets look like they’re about to get scared again."
In other words – the dollar carry trade is running out of oxygen. I believe Karl 'No Slave To Fashion' Denninger made the same point just two weeks ago, and you might want to take a look at his latest update on the subject. Another strange new phenomenon is the VIX rising and falling in line with equities, which confirms Carolan's point that fear is creeping back into the market. All this suggests that conditions are now favorable for a market decline. You have been warned.
I have been quite verbose on the notion that the thinly traded rally of past few days was designed to further discourage the bears and to shake out weak hands. I'm sure that many traders simply gave up and cashed out as to not to suffer from further theta burn throughout the long weekend. I myself was very tempted but did not yield to my emotions.
After posting the above I got a bit excited and as I was too lazy to head to the gym during turkey day I decided to finally put together a proper ISEE chart on my own:
A little update – I got fascinated with the ISEE and worked all day to import the data into Excel – here are some follow up charts for you guys:
Now, isn't that a lot nicer? I have also highlighted all spikes above 135 and all drops below 100 in the past year.
Here is the ISEE 10-day MA version – the focus here is twofold: First we have divergences which seem to indicate that a medium term trend is running out of steam. Then we also have a pretty obvious channel to the upside, which seems to also be a precursor for turning points lately – it's actually more timely than the pure data as of late. You might have noticed that we have not pushed into the upper channel line this time around, so perhaps more upside is a possibility.
Now, before you complain that I only peddle my lukewarm charts from yesteryear here on the Slope – here's one I just posted over on ES. This is one of my own chart contraptions which shows me the NYSE A/D ratio during the daily session. It actually closed nearby at 1.79 today but what you might not be aware of is that it was at 0.05 earlier this morning, not that's not a typo. After the opening bell the futures went completely ape-crazy (damn, I can't really curse properly on this PG-13 blog) and traversed 20 ES points in a matter of 90 minutes. All the while the NYSE A/D ratio never pushed above 0.2, that's right.
Sorry folks – I just can't take today's snapback seriously. Of course there is a good chance we fill the gap on Monday – it's quite obvious that the boyz have become quite brazen and outright complacent when it comes to putting a floor underneath the market, at least compared with their Asian or European counterparts. However, long term – my dear Slopers – long term I'm looking at a market that's curling over. And you really don't need all these fancy tools above to see what's happening – a good old fashioned volume chart speaks volumes:
Quite obvious what's happening but I highlighted the pertinent parts for you guys – sideways or caving volume on up trends and rapidly rising volume during sell offs.
The events in Dubai are completely meaningless and should be faded – remember, the market never follows the news, it's the other way around. What happened in Dubai is merely symptomatic of a much larger problem which is not merely limited to the gulf region. As a matter of fact after a one year reprieve the U.S. mortgage industry is now again looking at a huge number of monthly mortgage resets (which will trigger defaults) in the CRE and private real estate sector. Which brings me to my last chart and perhaps the one you might enjoy the most:
The CS portion of this charting monstrosity shows what the freight train that's heading for the real estate market. I took the liberty to extrapolate the data with my own wave count. Print it out and keep it handy – either it will by my chart of shame (i.e. I was wrong) or it's the chart evil Mole will be remembered by.
Enjoy the rest of your holiday weekend.