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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!

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Nasdaq New Highs are at a cycle low and New Lows are at a cycle high; what is this odd set of circumstances telling us?

It has certainly been a monumental week in the stock market. Moves in both stock prices as well as market-based indicators have been interesting and, in some cases, historic. Take, for example, our Chart Of The Day yesterday.

Now, given the recent market action, it's not at all surprising that the number of New 52-Week Lows are elevated currently, nor that the number of New 52-Week Highs are very low. However, per our data provider, the number of New Lows on the Nasdaq exchange reached a cycle high yesterday of 400. That was the highest number since the market low on February 11, 2016. Again, it's not surprising to see the number elevated. However, it's a bit surprising to see it hit a cycle high with the indices not far below all-time highs here.

On the other end of the spectrum, Nasdaq New Lows hit just 13 yesterday. That's not surprising either. However, that is also a cycle extreme, i.e., the lowest also since the market bottom on February 12, 2016. Again, it's not surprising to see the direction they're headed in -- but to see both at cycle extremes is really interesting.

Now, we were curious to see if there were other instances of the 2 series at opposite extremes. As it turns out, there have been a handful of other (interesting) occasions, which we examine in a Premium Post at The Lyons Share.

The high New Lows and low New Highs obviously results in an extreme in the number of net New Lows (i.e., New Lows - New Highs). Yesterday’s Net New Lows represented 12% of all issues, as we see in the chart below.

Now, certainly a lot of 52-week lows and a dearth of 52-week highs is not ideal for a stock market bull. However, as the chart demonstrates, there does come a time when the data is so bad that it is good. Or, in other words, it can’t get much worse. However, are we at that point yet? The Net New Lows are certainly well below the highest levels highlighted on the chart. Furthermore, the market is not that far off of its highs. Does that make a difference in how we should interpret this data? We take a closer look at that as well in our Premium Post at TLS.

One thing is for sure -- these breadth readings are certainly unusual.

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!

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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!

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The Nasdaq 100 is hitting a potentially key piece of resistance computed from its 2000-2002 decline.

The tech sector, largely reflected by the Nasdaq 100 (NDX), has been a relative leader in the equity market for a long time now. Yet, as strong as the trend has been, at some point it will end. We try to stay with the relative strength trends until they are broken. But is there any way to identify when a rally may be hitting its peak, i.e., top, instead of waiting for the trend to be broken? In that hypothetical case, it may allow investors an opportunity to avoid giving back perhaps considerable gains between the time of the top and the point at which the trend is broken.

One tool that we have found to be effective, at times, in that regard are Fibonacci Extensions, which we’ve discussed in the past on a few occasions. As a refresher, these Extensions mark various magnitudes of potential price support or resistance following range breaks, based upon the Fibonacci mathematical sequence. The 161.8% is perhaps the most important Extension, based on the sequence. It signifies a move of 61.8% of the former range – out of the range.

In the case of the NDX, we observe that the index is now reaching the vicinity of the key 161.8% Fibonacci Extension of the major 2000-2002 bear market at 7300.

Now, clearly on a chart of such a long-term scale, there will be some wiggle room above and below that 7300 level. But is this general vicinity a logical spot to expect a major top in the NDX? In a Premium Post at The Lyons Share, we take a look at some other chart analyses in exploring that possibility.

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!

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Recent new highs in the tech sector have occurred on decreasing participation.

For the most part, the rally off of the early 2018 correction lows has occurred on strong breadth, or widespread participation from individual stocks. We are starting to see some potential signs of a change in that trend this week, however. As we mentioned yesterday, the small-cap market failed to keep pace with the new high in the Nasdaq 100 (NDX) on Tuesday. We saw another manifestation of the possible “thinning” of the tech rally as well on Tuesday (7/24). While the NDX closed at an all-time high, the accompanying breadth was relatively very weak for a new high.

As evidence, the % of both advancing issues and advancing volume on the Nasdaq exchange equated to less than one third of all exchange data on Tuesday. In the history of the NDX, that is the only time we have ever observed such conditions on the occasion of a 52-week high in the index. Furthermore, at 32.4%, the advancing volume was the lowest on record for any NDX 52-week high.

As the chart indicates, there have only been 15 occurrences now when the NDX closed at a new high with less than even 44% of advancing Nasdaq volume. A few of those instances marked tops of at least short-term significance in the index. So should we be concerned -- or is this just a 1-day fluke data point?

Given the strong participation throughout most of the current multi-month rally, we would tend to give bulls the benefit of the doubt. However, would an objective, historical examination of the data warrant such patience? In a Premium Post at The Lyons Share, we take a quantitative look at the historical data to determine how concerned we should be about a “thinning out” of the tech rally.

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!

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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!

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Despite the Nasdaq’s big drop yesterday, New 52-Week Highs on the exchange hit their highest level in nearly 2 months.

Yesterday’s action in the stock market was interesting, to say the least. In a year filled with strange developments, yesterday may have taken the cake. Right off the bat, you had the Dow Jones Industrial Average up nearly 100 points, while at the same time the Nasdaq 100 was lower by 111 points, or about 1.75%. The dispersion didn’t stop there as other market segments and sectors went separate ways as well, and in a big way in some cases. Banks, transports and retail averages were up 2-3% while semiconductors and other technology areas were down as much as 4-5%. So, again, it was a weird day.

Getting back to the Nasdaq, we find another odd occurrence, and the subject of our Chart Of The Day. While the Nasdaq Composite also dropped over 1% yesterday, the internals were not nearly so bleak. In fact, according to our data provider, New 52-Week Highs on the Nasdaq exchange totaled 311. That marked the highest level of New Highs in almost 2 months on the Nasdaq -- on a day the index dropped over 1%.

Is that unusual? Yes. Unprecedented? No. But it is just the 10th time since the beginning of our Nasdaq New High/New Low data in 1988 when New Highs hit their highest level in 40 days on a day when the Nasdaq Composite lost at least 1%.

What is the message behind this development? Is there a message? Well, as most of you know, we like to look at the historical precedents for clues as to any potential meaning or detectable pattern to similar developments. It does not mean that history has to repeat, but a study of the past can sometimes provide helpful instruction as to what to possibly expect, or not expect.

In this case, the performance of the Nasdaq Composite following the historical precedents is highly interesting -- especially in its multiplicity. In the very near-term, the index tended to bounce back a bit. In the long-term, well, check out the 1-year returns after the previous 9 occurrences:

6 of the 9 occurrences saw the Nasdaq HIGHER 1 year later by between 18%-71%

3 of the 9 occurrences saw the Nasdaq LOWER 1 year later by between 18%-40%

It’s important to note that there is essentially no over-lap to these 9 precedents. That makes the varied returns quite fascinating. What accounts for the difference? Or, better yet, how can we gauge which category our present case might fall into? In a Premium Post at The Lyons Share, we identify what we think is a significant factor in determining whether this development is more likely to end up a big winner, or a big loser.

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!

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No 52-week high in the Nasdaq 100 has ever been accompanied by as few advancing stocks as today’s.

As most readers know, we are big proponents of strong breadth, or participation, in signifying healthy markets. When rallies are accompanied by a large swathe of advancing stocks, it is more likely to go further and last longer than those coming on the back of just a relatively few stocks. As such, it was encouraging to see the significant level of participation during the August-October stock market rally. Recent efforts, however, have not been so robust.

Today’s action on the Nasdaq exchange is Exhibit A. On the one hand, the Nasdaq 100 (NDX) managed to rally -- again -- closing at a new all-time high -- again. Despite the new high, however, the breadth on the Nasdaq read as follows (according to our vendor):

Nasdaq Advancing Issues: 840

Nasdaq Declining Issues: 2105

If that seems unusually skewed to decliners considering the NDX hit a 52-week high, you are on to something. As a matter of fact, at 28.5% of all issues, today saw the fewest advancing issues ever on a day when the NDX closed at a 52-week high.

So, is this dwindling participation a serious warning sign for the rally? Or is today a random outlier, irrelevant to the bigger picture? In a member post at The Lyons Share, we look deeper into the issue of participation, using quantitative evidence to come to an informed conclusion.

If you’re interested in the “all-access” version of our charts and research, please check out our new site, The Lyons Share. Find out what we’re investing in, when we’re getting in – and when we’re getting out. Considering what we believe will be 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!

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