Sometimes the crowd is right

-

 On September 9, investment research and analytics firm SentimenTrader highlighted the chart below. It noted extreme readings in hedging positions (when institutions buy put options) for the past 20-plus years.

Looking at this chart, you can see that the panic-hedging in early September was three times more extreme than the one in 2008 (the height of the financial crisis)...

Now, the contrarian trader or investor would think this is an easy trade... by taking the opposite side of all this put buying (in this case, buying stocks or call options). When the crowd is bearish, it pays to be bullish. It's what we expect with a rally.

But that's not what happened...

Below is a chart of the S&P 500 Index from January 2022 through its October low. As you can see, the index is in a bear market. The black dashed line marks lower highs of that downtrend. I highlighted this simple analysis throughout 2022 in the Ten Stock Trader service.

The record number of hedges from traders (marked with the red arrow) was followed by a small rally... before stocks kept declining. Take a look...

So what's the takeaway?

Sometimes the crowd is right.

Comments

Post a Comment

Popular posts from this blog

Critical Thinking, Logic & Problem Solving The Ultimate Guide to Better Thinking, Systematic Problem Solving and Making Impeccable Decisions with Secret Tips to Detect Logical Fallacies Bigrock Thinking

-
Image
  Critical Thinking, Logic & Problem Solving The Ultimate Guide to Better Thinking, Systematic Problem Solving and Making Impeccable Decisions with Secret Tips to Detect Logical Fallacies Bigrock Thinking Have you ever wished you were a more effective thinker? Do you feel overwhelmed when presented with a problem? In  Critical Thinking, Logic & Problem Solving , Bigrocks Thinking explains how you can enhance your critical thinking and problem-solving abilities to improve your learning, your work, and your personal life. The authors provide a step-by-step method for improving your ability to think critically and solve problems. They offer tips for conducting and thinking about research and information, covering issues like source reliability and logical fallacies. They also explain how to develop and implement solutions to problems, and they provide guidance on how to structure your thinking for effective communication and powerful storytelling. In our guide, we’ll also...
Read more

Higher interest rates not lowering interest rates

-
Image
  As I dug into the data this morning, I found a few things that were interesting. First, January’s 0.5% acceleration in the CPI was the  most since October 2022  (also 0.5%) and you have to go back to June 2022 for a higher monthly acceleration. The general consensus is that higher rates should lead to lower inflation. This means the 2-year inflation expectations in the market should be declining as the Fed gets more aggressive, but as Lisa Abramowicz pointed out this morning, inflation expectations in the market have actually been increasing over the last 6 months. Lisa Abramowicz @lisaabramowicz1 U.S. 2-year inflation expectations have surged over the past six months, despite tighter Fed policy. 1:16 PM ∙ Mar 2, 2023 86 Likes 35 Retweets Inflation expectations are not the only place where the market is being distorted by this central bank intervention though.  Charlie Bilello points out  that US Treasury yields have gone from historic lows to 16-year highs in...
Read more

Global Sea to SK

-
  Shipping companies appear to be attractively priced right now. The U.S. Global Sea to Sky Cargo Index (SEAX) currently has a price-to-earnings ratio (P/E) of just over 2.0, which is significantly lower than stocks in related sectors and industries (transportation and industrials), as well as the S&P 500 and tech-heavy Nasdaq-100. The U.S. Global Sea to Sky ETF (NYSE: SEA) seeks to track the performance, before fees and expenses, of SEAX, a 29-stock index that provides diversified access to the global sea shipping and air freight industries. The index uses various fundamental screens to determine the most efficient sea shipping, air freight and port companies in the world.
Read more