Thomas
DeChastelain
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An Infrequent Look At Some Long-term Sentiment Charts
posted Jun 1, 2006 at 12:47AM

Introduction

As you probably know there has been some chatter about a coming "crash" of the markets, and not just from he usual perma-bear crowd. A lot of this is coming from the fact that first Saudi Arabian markets, and then other emerging markets, have been getting chopped severely, and that the chain reaction is going to start moving up the food chain.

Again, given that any non-dividend paying equity is inherently worthless, the possibility of a crash is always present. But my own thinking is "not yet". One, although the markets are certainly not cheap, nor are they within the realm of irrational exuberance. Plus all the talk of a crash works against that possibility coming to fruition -by definition a crash has an element of surprise

There is as well the chatter of commodity bubbles popping. Maybe, but in the short term these trees have already been given a pretty good shake and I think they should be fairly steady for awhile.

Of course, this is a subject all in itself, but it did get me to looking at some charts that I have not perused for awhile. There are no conclusions or trading bets to be made from them ...but I think these charts may come in handy in time, and are interesting for their own sake.

VXO



Here is a chart mapping the VXO (old formula) against the Nasdaq. I know there are some people who use the VIX for daily trading. I am not one of them. To me the only time the VXO becomes useful is when it "spikes", preferably over 40. As I like to say "real fear can't be faked".

When you look at the above you can notice that the real best signals is when you get a double spike. The first one leading to a bounce, which then gets sold into, and forcing the chart lower, again causing another fear spike. If the spike is equal or less than the previous spike then you have a positive divergence.

I think in English what you have is fear driven panic selling, then a bounce which lets everyone who got caught napping to also sell out. All of this leaves a market that is wrung dry, and can be pounced on from a contrarian point of view.




I was just looking to see if there was any relationship between bullion and vxo spikes. To tell you the truth I don't notice anything that is concrete enough that can be used as a timing device. Kind of surprising as you would think fear and rising bullion would go hand in hand.



Here perhaps you can see the difference between paper proxies and the physical metal. When the fear is real and high, even gold equities, at first, will get hit with the broader markets. But only for awhile ... no doubt as soon as the market realizes that the Fed will, or will have to come to the rescue by turning the taps on, gold equities usually repond first.

Put/Call Ratio



Just a long term chart of put-call ratios. It is a busy chart. The red lines capture daily values, and as you can see they can be very volatile. The blue line is a 10 day simple moving average, and makes it easier to visualize longer term trends.

You can see how bearishness was just squeezed out of the market as it approached its peak in 2000. As you can notice, the buying of puts has not tapered off appreciably despite the rally of the past two years. Now whether the puts are being bought by bears making direct negative bets against the market, or longs who are hedging their position with a safety net - in the end it shows that that there is still a lot of mistrust out there. Whether justified or not, these negative bets are another reason why I don't think the market is quite ripe for "crashing".



Just adding the Nasdaq now to highlight the above.



Here there does seem to be a pattern. Specifically, nervousness towards the market is good for gold. All in all the liquidity which is pumping up the market is of course also good for gold, which is why it is outperforming, and ironically the higher the market goes the more "nervous" people become. All in all a sweet spot for gold and which is why I, as an overall commodity bull, have no angst about seeing overall markets continuing their uptrends.



It just hit me how a change in format, can affect the "look" of a chart. Usually I use the format below, which is a 700 pixel wide chart. The ones above are "portrait". (all are log scale).

In the chart above gold has a much more dramatic "parabolic" look to it when compared to the usual charts I show. As a general rule you don't want to buy near the top of parabolic rises, as they have a tendency to reverse sharply and deeply.



I have not changed my mind yet from the weekend commentary. I still think gold stocks are going to try to bounce over the short-term. Thier performance today in the face of bullion's decline is bullish price behaviour.

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