#$dxd

By some measures, trading in inverse ETF’s has hit record levels during the recent selloff.

For the past several weeks (or even longer) we have been warning about extremely complacent sentiment among stock investors. Specifically, data from the equity options market indicated that hedging (i.e., put volume) was as scarce as it had ever been in the history of the data. Now, such a condition may not necessarily equate to a catalyst for a market selloff. However, the lack of hedging, or downside protection, certainly suggested that any decline that may occur would run the risk of accelerating quickly as traders began scrambling for protection. This is a scenario that we have seen unfold over the past week.

Specifically, in the Nasdaq/large-cap tech space, the selloff that began a week ago — directly from all-time highs — quickly began to snowball, presumably as unprotected traders rushed to sell or adopt protection. The result of the tenuous market structure was one of the swiftest 10% declines from a 52-week high in market history — just 3 days in the Nasdaq 100!

That’s the bad news. The good news is that all that scrambling for protection has wrung out a good deal of the complacency that led up to the selloff. In fact, by some measures, we have never before witnessed such a rush to put on hedges. At least that is the case when looking at trading volume in inverse exchange traded funds (ETF’s).

Of course, inverse ETF’s are designed to go up when their corresponding indices go down. That is why we call them hedges, or protection. And based on relative volume in such products, Thursday and Friday marked the busiest days ever in terms of ETF trader hedging. Specifically, volume in inverse ETF’s accounted for 2.69% of total exchange volume on both Thursday and Friday. Those are the highest readings we have ever recorded since we began tracking this indicator some 10 years ago.

FYI, the computation for this indicator, which we first saw utilized on sentimentrader.com, is a proprietary one. It does not include an exhaustive array of inverse ETF’s, but rather a group that we have been tracking now for about 10 years. Thus, someone else may come up with entirely different figures, though, likely the same general curve.

What is the takeaway from this data? Well, the rush into inverse ETF’s represents a healthy reversal of the complacency and lack of hedging we saw in the weeks and months leading up to last week’s top. In fact, from the bulls’ perspective, the more panic, the better from a contrarian standpoint. Of course, after coming off such low levels of hedging, it’ll take extreme panic to even put sentiment back into some balance. However, the heavy inverse ETF activity was at least good enough to contribute to yesterday’s sharp bounce in stocks.

The question is — is it sufficient enough to provide for a longer-lasting rally or merely a flash in the pan? Today’s reversal back down suggests it is the latter but the jury is certainly still out on this one.

How much “stock” are we putting into this data point? How is it impacting out investment posture? If you’re interested in an “all-access” pass to all of our charts, research — and investment moves — please check out our site, The Lyons Share. You can follow our investment process and posture every day — including insights into what we’re looking to buy and sell and when. Thanks for reading!

_____________

Relative volume in inverse ETF's hit an all-time high yesterday.

Perhaps one of the reasons for the swiftness in the present stock market selloff is the fact that traders were totally unprepared for it. At least, their investment allocation would suggest that as the level of protective hedges was extremely low by most measures heading into October. And certainly any efforts at identifying a sustainable bottom to the selloff must include a substantial turnaround in these conditions. Well, at least by one hedging source, we may close to a low of some significance.

The source in question is inverse ETF's, i.e., funds that go up when the market goes down. When action is extremely subdued in these funds, it can be a sign of complacency -- and risk of decline as traders have little protection, or hedging, on. On the other hand, when we see extremely high volume being traded in these funds, it can be a sign of fear -- and a potential bottoming signal. That latter condition may be valid now because yesterday saw the heaviest volume ever in inverse ETF's, as a percentage of overall exchange volume.

FYI, the computation for this indicator, which we first saw utilized on sentimentrader.com, is a proprietary one. It does not include an exhaustive array of inverse ETF's, but rather a group that we have been tracking now for about 5 years. Thus, someone else may come up with entirely different figures, though, likely the same general curve.

The interpretation of this data is pretty straightforward. As we said, high levels of Inverse ETF volume can indicate fear and set the stage for a market bottom. As the chart shows, that has been the case at times in the past. So for those looking for a bounce, this is certainly a feather in their cap. Of course, the question is how much of a bounce will we get and how long will it last?

If you’re interested in the “all-access” version of our charts and research, please check out our new site, The Lyons Share. You can follow our investment process and posture every day — including insights into what we’re looking to buy and sell and when. Thanks for reading!

_____________

September of the 2nd year of the Presidential Cycle is historically the weakest month of the 4-year cycle.

Since working off its early year correction, the U.S. stock market has been on one of those inexorable runs that we’ve seen on so many occasions in recent years. Such runs have seen the market essentially steamroll any and all potential pitfalls that may arise. This recent run has been no exception as the stock rally has basically remained bulletproof to any exogenous hazards (real or fake). But just when the market is on this roll, even breaking out to new highs and apparently incapable of going down, a bout of selling strikes, seemingly out of nowhere. However, if we look a little deeper, perhaps we shouldn’t be surprised by the recent weakness.

The Presidential Cycle refers to the pattern of behavior in stock prices throughout the four years of a presidential term. Specifically, stocks tend to be strong during certain periods of a president’s term and weaker during others. And while there are many factors influencing stock prices during a particular period of a particular presidential term, the cycle has been one of the more historically consistent seasonal patterns.

This may be relevant to the current weakness because, on average, the worst performing month of the cycle, historically, has been September of year 2, i.e., the current month.

As the chart shows, since 1900, September of year 2 of the Presidential cycle has returned an average of -1.43%, slightly worse than September of year 3, February and September of year 1 and May of year 4.

Again, there are many factors that determine the market’s return in a particular month. And returns for a particular month in a particular year will not always match its historical average. That’s what makes an “average”. But to the extent that any month of the cycle can be relied upon to be weak, it is this September of the 2nd year of the Presidential cycle.

But just how reliable is it? And does the market’s recent level of conformity to the historical cycle enhance the pattern’s reliability? And to the extent that it does, what does it imply about the market’s potential path going forward?

In a Premium post at The Lyons Share, we discuss the current year’s performance relative to the historical pattern -- and what it may portend following the current weakness.

If you’re interested in the “all-access” version of our charts and research, please check out our new site, The Lyons Share. You can follow our investment process and posture every day — including insights into what we’re looking to buy and sell and when. Thanks for reading!

_____________

There is some evidence to suggest that stock investors would be well served by selling in May and going away this year.

One of the most famous of all of Wall Street’s trading bromides is “Sell In May & Go Away”. Of course, the saying refers to the tendency of stocks to perform worse during the 6 months from May through October than they do from November through April. Perhaps the reason why it is still so popular is that, unlike some of Wall Street’s other sayings, there is actually solid historical evidence to back it up, including recent history.

Specifically, here are the average returns in the Dow Jones Industrial Average during the 2 periods since 1900:

November-April: +5.45%

May-October: +1.61%

Not only does the average return for the May-October period lag badly, but the consistency of positive returns has been less reliable:

November-April: 69% Positive Returns

May-October: 61% Positive Returns

Plus, as mentioned, unlike many seasonal tendencies that lose their effectiveness over time as the edge gets arbitraged away, the Sell In May pattern has held true even as of late. For example, 7 of the last 8 years, 11 of the last 13 years and 19 of the last 24 years saw the Dow stronger from November-April than from May-October.

So is there any thing that bulls can hang their hat on during the forthcoming 6 months? Well, first of all, despite the fact that May-October has generally lagged its 6-month counterpart, the historical average return for the period is still positive. So it’s not like the whole period has been a disaster, though there have certainly been some of those.

In parsing the data, however, we have found one historical trend that may suggest that the “Sell In May…” advice may be better served this year than most. It is based on the (also relatively consistent) 4-year Presidential Cycle. Naturally, the average Sell In May returns are not uniform across all years. And specifically, we see dispersion, and a wide one at that, among the 4 years within the Presidential Cycle. For example, during “Year 4’s”, the May-October average returns actually exceed those of the November-April period.

It is a different story in “Year 2’s”, however. In fact, at +0.00%, the average May-October return during Year 2’s is the worst of any of the 4 years.

We will say that this seasonal tendency is far down on the list of decision-makers for us as it pertains to these upcoming 6 months. We have our models and indicators that we track which, as always, will guide our investment posture. That said, to the extent that the Presidential Cycle does exert influence on the “Sell In May…” pattern this year, there is evidence to suggest that investors may be well served to follow the advice.

If you’re interested in the “all-access” version of our charts and research, please check out our new site, The Lyons Share. You can follow our investment process and posture every day — including insights into what we’re looking to buy and sell and when. Thanks for reading!

_____________

Historically, the next 2 quarters represent the worst 2-quarter stretch for stocks in the entire Presidential Cycle.

The Presidential Cycle refers to the pattern of behavior in stock prices throughout the four years of a presidential term. While there are many factors influencing stock prices during a particular period of a particular presidential term, it has been one of the more historically consistent seasonal patterns. Specifically, stocks tend to be strong during certain periods of a president’s term and weaker during others. And, historically, the worst 2-quarter stretch of the presidential cycle is the period spanning the 2nd and 3rd quarters of the second year of a president’s term. The stretch began this week.

Over the past 100 years, average returns in the Dow Jones Industrial Average for both the 2nd and 3rd quarters of “year 2’s” have been negative, the only consecutive negative quarters of the entire cycle.

Furthermore, in aggregate, the 2-quarter stretch ending with the 3rd quarter of year 2 of the presidential cycle is the only 2-quarter stretch with a negative average return in the entire cycle.

Of course, seasonality is only one factor affecting stock prices. Therefore, this negative historical tendency should only be treated as a gentle headwind. However, after a lengthy stretch in which bulls seemed to have just about everything going their way, more and more of these potential headwinds seem to be popping up of late.

If you’re interested in the “all-access” version of our charts and research, please check out our new site, The Lyons Share. You can follow our investment process and posture every day — including insights into what we’re looking to buy and sell and when. Thanks for reading!

_____________

After receiving very little interest in over a year, volume in inverse ETF’s spiked to near record levels yesterday.

Over the past several weeks, we noticed that investor sentiment had relieved a fair amount of its short-term frothy condition. Much of that was based on various measures from the volatility market. One area that had not shown a similar uptick in fear or nervousness was investor flows in the stock market. Folks were still consistently buying the diips, and the rips, and were all but shunning equity-based hedges altogether...until yesterday.

Now there are still some concerning data points related to money flow and a lack of hedging, but when it comes to inverse ETF’s, yesterday saw a long-awaited uptick in interest from traders. Inverse ETF’s, of course, are designed to rise when the stock market falls -- and vice versa. Thus, when the market is dropping, we typically notice increased volume in these instruments, signaling an uptick in investor fear.

Using a concept we first saw utilized by Jason Goepfort at www.Sentimentrader.com, we can use volume data from inverse ETF’s as a measure of investor sentiment. When volume spikes, it is a sign of fear, and when it is extremely subdued, it can be a sign of too much complacency.

With the proliferation of ETF interest around the time of the financial crisis, we now have nearly a decade of data with which to utilize for purposes of gauging sentiment. We prefer to measure volume versus total volume on the exchanges to provide a relative standard.

From 2010 to 2016, we found that volume in the inverse ETF group that we track (not a comprehensive group) has averaged about 0.7% of total volume on the NYSE and Nasdaq exchanges, with wider swings in either direction along the way, obviously. Since the beginning of 2017, however, volume in inverse ETF’s has been extremely depressed.

In fact, in 2017 there were just 11 days that saw higher than the historically average (0.7%) level of relative volume in inverse ETF’s. The last 4 months saw exactly 2 days above average. The relative calm, not to mention dearth of stock market losses, led investors to be especially complacent. As we said, though, that changed yesterday.

It took a few days, but the recent bout of weakness has apparently gotten traders’ attention. We say that because yesterday (2/5/2018) saw the 3rd highest volume total ever in inverse ETF’s, as a percentage of total exchange volume, at 2.11%.

As the chart indicates, just 3 other days in history (10/4/2011, 10/15/2014 and 8/24/2015) have seen at least 2% of exchange volume go to inverse ETF’s. In hindsight, those 3 days were pretty good times to be adding equity exposure. Will this time be the same? There are no guarantees, plus “3″ is an incredibly small sample size. However, it is at least encouraging to see some of investors’ complacency beginning to abate.

In a Premium Post at The Lyons Share, we take a deeper, quantitative look at some of the similar historical precedents and the accompanying market action. If you are interested in the Premium version of our charts and research, check out our “all-access” service, The Lyons Share. You can follow our investment process and posture every day — including insights into what we’re looking to buy and sell and when. Thanks for reading!

_____________

After a record run of muted movement, will recent volatility send negative shock waves through stock market?

The recent uptick in stock volatility has some investors on edge (OK, it is mostly just financial news editors on edge). The truth is, while volatility over the past week has seen an increase, it is not all that far away from the historical norm. Last Thursday through Monday, for example, the Dow Jones Industrial Average (DJIA) experienced 3 straight “volatile” days, with daily ranges of between 1% and 1.6% on all 3 days. Looking historically, however, we find that the average daily range in the DJIA over the last 90 years is 1.6%. Even during the current bull market since 2009, the average range is 1.08%. Thus, the recent action should hardly be characterized as volatile.

The reason it perhaps seems so tumultuous is because we are emerging from a long stretch of calm in the market -- record calm, at that. Prior to Thursday, the DJIA had gone 72 days without experiencing a daily range as wide as 1%. If that sounds like a long stretch, it’s because it is a record. In fact, the record prior to this recent streak was just 49 days in a run that ended in late February of this year. And prior to 2016, the record going back to 1928, according to our database, was a mere 32-day streak back in 1944 -- less than half the recent streak.

Furthermore, historically, there have been just 16 streaks that have lasted as long as 21 days, i.e., 1 month.

Interestingly, this recent streak is the first of any of the 16 that saw 3 straight 1% daily ranges immediately following its culmination. So is mean-reversion starting to rear its volatile head here following the record calm? And is there a nefarious message to the sudden uptick in volatility? In a Premium Post at The Lyons Share, we take a deeper dive into prior streaks of calm in search of clues that may help shape our expectations for our present case.

If you’re interested in the “all-access” version of our charts and research, please check out The Lyons Share. Find out what we’re investing in, when we’re getting in – and when we’re getting out. Considering that we may well be entering an investment environment tailor made for our active, risk-managed approach, there has never been a better time to reap the benefits of this service. Thanks for reading!

_____________

The 4th quarter of years ending in “7″ have historically exhibited the stock market’s worst quarterly performance of the decadal cycle.

Exactly 3 months ago, we published a post highlighting what we discovered to be serially poor historical performance in the stock market during the 2nd half of years ending in a "7". In fact, the period has historically exhibited the worst performance of any semi-annual period of the decadal cycle. Here's what we wrote:

"Given our current year “2017”, we were recently pondering the unfortunate fate that has befallen the stock market during the most recent years ending in a “7”.  There was the market top of 2007, the Asian crisis in 1997 and the crash of 1987.  It got us wondering if this was just some recent fluke – or if there really was a sort of a curse around “7” years.  So we got out our history books (i.e., we scrolled to the left on our chart of the Dow Jones Industrial Average) to check previous “7” years going back to 1900.  As it turns out, 7 does indeed appear to be quite unlucky.

Consider the track record for the back half of “7″ years:

2007: “Just” a 10% drawdown, but also a cyclical market top

1997: Asian Crisis…swift 17% drawdown

1987: “The Crash”…20% decline, with a 41% drawdown

1977: Cyclical bear market…9% decline, with a 15% drawdown

1967: Up 5% for half, but 12% drawdown, all in the 4th quarter

1957: Straight down from July…13% loss, with 20% drawdown

1947: Mostly unscathed…2% gain, with ”just” a 7% drawdown

1937: Major bear market…Down 29% with 41% drawdown

1927: Roaring bull…9% drawdown, but a gain of 21%

1917: Cyclical bear market…22% decline, with a 31% drawdown

1907: Cyclical bear market…24% decline, with a 35% drawdown

So, at first blush the track record looks pretty lousy. But is it any worse than most semi-annual periods? Yes.

At -9.29%, the 2nd half of “7″ years has the worst median return of all half years. In fact, it is one of just 3 halves with negative median returns, along with the 1st half of “0″ years and the 2nd half of “1″ years. And other than the 1st half of year “0″, the median return of the 2nd half of year “7″’s is over 600 basis points worse than any other half year.

Looking at drawdowns, the picture is just as bad.

On average, the 2nd half of year “7″ has experienced a drawdown of more than -20%, much worse than any other half year (FYI, the median drawdown in the 1st half of year “0″ is worse than that of the 2nd half of year “7″, -19.51% vs. -16.83%).

Thus, when we were pondering the rough ride that stocks have suffered over the past several “7″ years, its historical track record is actually even worse. Again, while we are not about to construct a trading system based on this data point, considering the overwhelming evidence, it does at least have our attention.

So, while the stock market remains in an uptrend, and hitting new highs in some cases, we do have an open mind that it may get “unlucky” at some point in the back half of this year."

Well, halfway through this supposed "worst semi-annual" period, stocks are no worse for wear thus far. In fact, the market is in the midst of a historically broad-based, involatile and relentless rally. So perhaps the "7" curse has been sidestepped?

Not so fast.

As the 4th quarter gets under way (and just in time for Friday the 13th), we took a fresh look at performance in "7" years. What we discovered is that the lion's share of the poor-performance during "7" year 2nd halves actually took place during the back half of those periods, i.e., the 4th quarter.

Specifically, of the -7.88% average historical return during the 2nd half of "7" years, a full 730 basis points, or -7.30%, of the loss took place in the 4th quarter alone. That ranks it as the worst average performance of any quarter of the decadal cycle.

Further, of the -21.69% average historical drawdown during the 2nd half of "7" years, 15.93%, or nearly 1600 basis points, took place in the 4th quarter alone. Not surprisingly, that equates to the worst average drawdown of any quarter of the decadal cycle.

Is there a silver lining? One small one is the fact that due to a few out-sized losses, e.g., 1987 and 1937, historical median returns and drawdowns for the quarter are slightly less horrific. However, as the yearly rundown listed above can attest, the period has still exhibited consistently weak performance.

A more profound and perhaps relevant silver lining, though, is the present structure of the overall stock market. As mentioned in the opening, the recent rally has been broad-based and has delivered just about every major market average to all-time high ground. But will this combination of solid internals and price momentum be enough to stave off the "7" year, 4th quarter curse?

If you’re interested in the “all-access” version of our charts and research, we invite you to check out our new site, The Lyons Share. TLS is currently running a 30th anniversary 1987 Crash Commemoration SALE, offering a discount of 22.6% -- the equivalent of the Dow's 1-day drop on October 19, 1987. The SALE ends October 22 so considering the discounted cost and a potentially treacherous market climate forthcoming, there has never been a better time to reap the benefits of our risk-managed approach. Thanks for reading!

_____________