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Articles by Troy

Market Report: investors’ limitless risk appetite

2 days ago

Investors are buying anything and everything in a manner that’s reminiscent of the 1990s. The best stocks to buy these days: money-losing tech companies. The more losses, the better because growth is the name of the game. In the 1990s, profits didn’t matter. All that mattered was “eyeballs” and user growth.

Summary
Here’s how I approach markets based on 3 different strategies & time frames.
Short term trend followers should continue to ride the rally because no one knows exactly when it will end. If you are a short term trend follower, you must use stops.
Medium term contrarian traders should go neither long nor short. Wait. Risk:reward doesn’t favor long positions right now, while shorting into a speculative rally can end in disaster.
Long term investors should be highly

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Major inflows, near-record sentiment, analysts chasing the market rally

4 days ago

Fund flow
The big 4 U.S. equity ETFs (SPY, QQQ, IWM, and DIA) saw major inflows in November and December. The following chart illustrates a rolling 2 month sum of fund flows into these 4 ETFs:

Historically, this was a bearish reading for stocks over the next 2 months:

But now that January is almost over and stocks rallied since December, does this mean that the bearish signal is invalidated? Not quite:

Investor positioning is still stretched, and this remains a warning sign for global equity markets.
Sentiment surveys
Regardless of which survey you look at, sentiment is extremely high. The National Association of Active Investment Managers’ Exposure Index is at its highest level since December 2017:

Back then, the U.S. stock market rallied for another 1 month (blow-off top)

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Strong breadth & momentum everywhere

5 days ago

By

Troy

January 20, 2021

The stock market’s relentless push higher has been supported by strong breadth & momentum. These are the 2 primary bullish factors for stocks right now.
A 50 day moving average of the NASDAQ Composite’s new high/low ratio is at its highest level in over 15 years:

Such strong breadth was only matched 3 other times over the last 40 years. Each of those 3 cases saw further stock market gains over the next 6 months, although those gains could vanish after that:

Nowhere is momentum more evident than in emerging markets right now. The MSCI Emerging Markets Index’s 20 dma increased 77 days in a row as the index broke through to an all-time high:

Such strong momentum almost

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More institutional selling, elevated sentiment, improving manufacturing

7 days ago

By

Troy

January 19, 2021

More institutional selling
While retail investors and traders plow into risk assets, there has been a sharp ramp higher in the # of institutional sellers. The # of institutional sellers in QQQ (NASDAQ ETF) jumped more than 30% in the past 4 months:

When this happened in the past, traders needed to be vigilant for the next few weeks and months. There was always an opportunity for sellers to buy back their stocks at a lower price:
September 2012: this occurred at the start of a -11.9% correction
June 2014: the NASDAQ rallied another +6.9% before it fell -8.4%
July 2015: the NASDAQ fell -13.9% correction immediately
June 2016: this occurred at the start of a -7.5% decline

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Market Report: smart money is selling at the fastest pace since 2007

10 days ago

Small speculative markets continue to explode higher while large cap markets rally less.
Summary
Here’s how I approach markets based on 3 different strategies & time frames.
Short term trend followers should continue to ride the rally because no one knows exactly when it will end. If you are a short term trend follower, you must use stops.
Medium term contrarian traders should go neither long nor short. Wait. Risk:reward doesn’t favor long positions right now, while shorting into a speculative rally can end in disaster.
Long term investors should be highly defensive right now. This speculative bull market may last another 6 months or even 9 months, but in 2 years time, long term investors will be glad they did not buy today.
Bottomline: trend is up, but beware of mounting risks.

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More speculative signs, energy rebound, commodities breakout, European sentiment

12 days ago

More speculative signs
Speculative signs keep piling up. Contrarian investors and traders have focused on surging penny stocks and micro-cap stocks in recent days. The smallest of small cap stocks are now more than 40% above their 200 day moving average! The last time this happened was in February – March 2000, near the peak of the dot-com bubble.
*This is the Dow Jones Micro-Cap Index, which is the smallest 50% of the Wilshire 5000 index:

It’s important to note that this also happened during the first year of the 2003-2007 (September 2003) and 2009-2020 (September 2009) bull markets. In those 2 historical cases, the stock market rallied another 4-6 months before major corrections began. This is a bearish sign for spring & summer 2021.
Energy rebound
Energy stocks are rebounding.

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Stock market surge everywhere, record Gamma, Treasury bonds falling, U.S. Dollar reversal

14 days ago

Stock market surge everywhere
Stock markets around the world – particularly in Asia – continue to surge. The average country’s stock index is 18% above its 200 dma! This is the highest reading in over a decade:
*I calculated this average using the following countries’ indices: U.S., Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, HK, Ireland, Israel, Italy, Japan, Netherlands, New Zealand, Norway, Portugal, Singapore, Spain, Sweden, Switzerland, UK, Brazil, China, India, South Korea, Mexico, Taiwan, Russia.

When so many stock markets around the world surged in the past, the S&P 500 (which accounts for approximately half of global market cap) usually rallied a little more over the next 3 months, followed by a sharp pullback.

High volatility is to be

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How to double your trading profits with insider trading data

15 days ago

There are 2 general ways to outperform buy and hold in the stock market:
Time the broad “stock market” (e.g. be fairly accurate at predicting corrections and bear markets)
Buy stocks that are better than the broad stock market
Today I will show you how insider trading data can help you improve your trading performance by buying stocks that are better than the broad stock market (S&P 500). Corporate insiders (e.g. CEOs, CFOs) are smart money. No one understands their company’s prospects better than corporate insiders.
How useful is insider trading data?
Factually speaking, just how useful is insider trading data? How much alpha can insider trading data add to your trading performance?
The following chart illustrates how much corporate insiders beat the S&P 500:

We took all insider

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Market Report: Will Markets Melt-Up before Melt-Down

17 days ago

The greatest pain trade in today’s highly speculative environment is if financial markets “melt-up before they melt-down” (to borrow Julien Bittel‘s phrase). Bears feel intense FOMO as markets rally despite numerous overbought readings, and bulls face losses if they overextend their stay when the market eventually falls. This is a thought shared by legendary investor Jeremy Grantham who published an excellent piece worth reading.
Summary
Here’s how I approach markets based on 3 different strategies & time frames. I diversify my portfolio into 3 strategies:
Long term investors should be highly defensive right now. This speculative bull market may last another 6 months or even 9 months, but in 2 years time, long term investors will be glad they did not buy today.
Medium term traders

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Jump in SKEW, small caps, financials, and material stocks

19 days ago

Jump in SKEW
A wall of money continues to flow from market to market based on the popular narrative at the time. 6 months ago it was “tech does well under corona”, so everyone rushed headlong into tech stocks. Now it’s “vaccines are good for the economy”, so everyone is rushing into small caps. Result: small caps jumped higher today while the NASDAQ fell.
In the meantime, SKEW‘s 3 week average continues to rise. SKEW measures the risk of a black swan event, so traders usually interpret high SKEW readings = bearish.

In the past, such high readings were something to be concerned about, but didn’t always result in an immediate correction.
October 2017: stocks rallied for another 3 months before VIX spiked and stocks fell.
July 2018: stocks rallied for another 2 months before stocks

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Will the stock market “bubble” last until spring?

20 days ago

By

Troy

January 6, 2021

Investors and traders should always be open to new ideas and different opinions. Previously I said that “medium term traders should remain defensive in Q1 2021“. Legendary investor Jeremy Grantham published his latest market outlook. I highly recommend you read it. Jeremy Grantham’s main points:
This is a bubble.
Predicting the exact top of a bubble is impossible.
“I know that this market can soar upwards for a few more weeks or even months – it feels like we could be anywhere between July 1999 and February 2000. My best guess as to the longest this bubble might survive is late spring or early summer, coinciding with the broad rollout of the COVID vaccine. At that moment,

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Bull case for commodities and ex-U.S. stocks in 2021

21 days ago

Let’s take a quick look at the bull case for commodities and ex-U.S. stocks in 2021, particularly in the 2nd half of 2021 (we may get a correction first!).
ex-U.S. stocks just broke out above its January 2018 high while its 14 week RSI crossed above 70:

Historical cases of strong momentum almost always led to more gains for ex-U.S. equities over the next year, although a short term pullback was possible.

While the media was busy talking about Bitcoin, IPOs, and other speculative instruments, the commodities rally in December received much less attention. Commodities – and agriculture in particular – are on fire.

“Re-flation” is a big theme this year. The following chart illustrates the 52 week correlation between ex-U.S. stocks and agriculture. As you can see, both global

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4 stocks CEOs (insiders) bought last week

22 days ago

In the coming weeks I will show you how to use corporate insider trading data to improve your trading performance. In the meantime, here are 4 stocks that CEO’s heavily bought last week. All purchases exceeded $100k.
Insiders sell for many reasons (gift, divorce, diversification), but they buy for only one reason. They buy when they believe that the stock price will go up.
Steel Partners (SPLP)
Steel Partners engages in banking, manufacturing, restaurants, defense, and finance. It saw significant insider buying last week from its CEO (Warren Lichtenstein), President (Jack Howard), and Director (Eric Karros).
A bullish sign: none of these purchases were pre-planned trades. Pre-planned trades are less important because they don’t demonstrate a discretionary decision to buy.
A bullish

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Market Report: who is buying and selling stocks

24 days ago

I wish you a happy and prosperous New Year. May 2021 bring you and your family good health and success. If you’re interested, we launched a new website that provides dozens of useful indicators for free.
Looking back, 2020 was a year that few will forget. From a markets point of view, it was a year in which “dumb money” (traders who chase trends) was the smart money. Global central bank intervention caused a “wall of money” to flow from one asset to another, resulting in a year when “everything went up”.

Market participants can notice a dangerous trend over the past 2 months. The riskier an asset is and the less intrinsic value it has, the better the asset has performed since November. Moreover, this “wall of money” is not infinite, and is flowing into assets with smaller market

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No consumer confidence, ex-U.S. breakout, more new highs

27 days ago

By

Troy

December 30, 2020

The U.S. economic recovery is K-shaped: most people are suffering while some are doing well. The stock market is rallying while Consumer Confidence has not recovered at all:

This may seem like a bearish sign for stocks, but it isn’t. The stock market is forward looking, and it’s normal for post-recession bull markets to have weak consumer confidence:

As has been the case for most of the past decade, U.S. stocks have outperformed ex-U.S. stocks. That is starting to change as ex-U.S. stocks challenge their January 2018 highs:

Contrary to standard technical analysis, breakouts aren’t always bullish. Breakouts are more bullish in the U.S. than outside the U.S., mostly

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Small caps breadth vs. momentum, greedy commodities traders

28 days ago

Small caps overbought
The Russell 2000’s nonstop rally has kept a meaningful % of its stocks in overbought territory for a long time:

Historical cases in which more than 5% of small caps were overbought for 36 consecutive days led to more-bearish-than-random returns over the next 2-3 months:

This is a bearish factor, particularly when the Russell breaks its upwards-sloping trendline.
Momentum
Momentum remains a bullish factor for stocks, and thusfar momentum indicators have beaten contrarian indicators. The Russell 2000’s momentum is very strong: it’s 3 day RSI has been consistently elevated.

When 3 day RSI’s 2 month average was this high in the past, small caps usually pushed higher over the next 2 months:

This is a bullish factor, and directly contradicts the previous bearish

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Surging margin debt, oil rig recovery, elevated sentiment

29 days ago

Surging margin debt
Margin debt has surged more than 50% over the past 8 months (since March 2020 bottom).

All historical cases of such aggressive positioning occurred near 1-2 year market tops. This happened near the start of the 1973-1974, 2000-2002, and 2007-2009 bear markets. The June 1983 historical case was followed by a 1 year-long stock market correction:

Oil rig recovery
Crescat Capital’s Kevin Smith noted that the U.S. oil rig count has stabilized near the lowest level in a decade:

Total World Oil & Gas Rig Count paints an even clearer picture: energy supply is at a multi-decade low. This should be bullish for energy in 2021, especially as the global economy recovers:

Crude oil usually pushed higher over the next 3 months when the U.S. oil rig count jumped from an

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Stock market risk, currencies extreme positioning, energy stocks are golden

December 22, 2020

Stock market risk
The CBOE Skew Index, which measures the risk of a black swan event for the S&P 500, jumped to the highest level in months. This is often seen as a contrarian indicator for the stock market and over the past 2 years has had a better-than-average track record for predicting market declines.

Overall, SKEW’s accuracy as a bearish signal was spotty. Historical cases in which SKEW was more than 12% above its 200 dma led to mixed results. Cases in the 2000s were mostly bearish over the next few weeks and months whereas cases over the past 5 years mostly led to more gains over the next few weeks and months.

U.S. Dollar extreme positioning
I noted yesterday that speculator positioning towards copper is at a historical extreme. Such extreme COT readings are not just

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Non-stop commodities rally, economic improvement, strong breadth, rally streaks

December 21, 2020

Non-stop commodities rally
Industrial commodities are surging in this “everything rally” as sector rotation occurs:
Precious metals first surged
Agricultural commodities then surged
Industrial metal commodities then surged

It’s not hard to see why commodities are rallying. Massive stimulus packages (money printing!) + global reflation theme + Chinese tariffs on Australia + a multi-year low in inventory…

All of this pushed our copper Short Term Sentiment’s 30 day average to its highest reading ever:
*part of the record sentiment reading is due to record speculator positioning towards copper

There are no comparable historical cases since this is a record for copper sentiment. Less extreme sentiment readings were not consistently short term bearish for copper, but usually led to

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Market Report: a rally for the history books

December 18, 2020

Last week I noted that:
You should be bearish right now if you are a short-medium term contrarian trader.
You should be bullish right now if you are a short-medium term trend follower.
If you are a long term buy and hold investor, your portfolio’s long term future returns will be poor. Passive investing will likely underperform active management in an era of high valuations.
I will focus more on medium term risks in this week’s Market Report. As stocks rally into year-end, it’s important to remember that you don’t always need to trade. Going short a rally is dangerous since a rally can always overshoot expectations. Instead, contrarian traders can simply hold cash until the next fat pitch comes along. There are 1-2 good opportunities each year in a volatile environment like the one

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Small cap stocks, India, Japan are on fire

December 17, 2020

Small caps
Sector rotation is pushing the stock market higher, with previous laggards such as small caps, financials, and energy stocks rebounding sharply. To put this into perspective, notice the Russell 2000’s massive outperformance since September 23:

The following chart illustrates performance for 4 major indices from the March bottom-present. As you can see, initially the NASDAQ outperformed other sectors. But now, the Russell 2000 is racing ahead. Such has been the dominant theme in 2020: traders all jump on the same bandwagons at the same time, pushing existing trends to extreme conditions. Traders jumped on the gold trend, then the tech stock trend, then the Bitcoin trend, then the IPO trend, and now the small cap trend:

As a result, a near record % of Russell 2000 stocks

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Short-covering, risky rally

December 16, 2020

By

Troy

December 16, 2020

There is a lot of speculative activity in the markets right now. Investors and traders are chasing the riskiest of assets these days, and the general attitude has become “the riskier, the better”. An index of the most shorted & most leveraged stocks has SOARED over the past 30 days, vastly outperforming broader indices such as the S&P 500, NASDAQ, and Russell.

This index outperformed the S&P 500 by more than 129% over the past 9 months (March 2020 bottom – present). That’s a lot of short covering. The previous record of 83% was on December 3, 2009. To put that into context, U.S. stocks performed poorly in the first half of 2010.

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USD sentiment: all aboard the bear train

December 16, 2020

By

Troy

December 16, 2020

The U.S. Dollar continues to trend downwards. Bloomberg’s Fear/Greed indicator for the USD Index has been in fear-mode for 30 consecutive weeks:

Such long streaks of bearish sentiment towards the Dollar usually led to medium term rallies over the past 30 years. Keep in mind that even if the USD rallies in the interim, it doesn’t mean that the Dollar’s bear market is over:

Meanwhile, the COT report continues to flash a medium-term bullish sign for the USD:

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Long streak of high volatility

December 16, 2020

By

Troy

December 16, 2020

As Bespoke noted, VIX has closed above 20 for 207 days in a row. Such long periods of elevated volatility are uncommon, and typically happened after a major market crash (1998, 2000-2002, 2007-2009):

Since these historical cases occurred after a major crash, the S&P 500 rallied further over the next year:

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December 14-17, 2020: market thoughts

December 14, 2020

The following is my stream of thoughts for the week December 14-17. This blog post will be continuously updated throughout the week with new thoughts.

As I mentioned last week, breadth is improving around the world. The % of S&P 500 tech stocks above their 200 dma has reached the highest level since the great 2017 rally:

When so many stocks were in a long term uptrend, the S&P 500 information technology sector usually pushed higher over the next year:
*The following table looks for the first time in 200 days

Given the current animal spirits that are lifting up markets and extremely high valuations, will this be the last blow-off top before a major market decline?
Commodities
Commodity prices are surging, with iron ore prices being one of the latest to join the advance.

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Market Report: looking back on 2020, and looking ahead

December 11, 2020

What a year it’s been. I hope you’re doing well, both health-wise and wealth-wise. This is the first time I’ve written my market thoughts on this blog since August 2019, so thank you if you’ve been following me since I stopped writing here a year ago. Now let’s dive into the markets.
It doesn’t matter if it’s a white cat or a black cat. If it’s a cat that catches mice, it’s a good cat.
There is a battle raging between bulls and bears right now.
Most bears are arguing their outlook by pointing at high sentiment, rich valuations, record-shattering options buying, and a lack of insider buying. Moreover, many bears think that a “real” correction is long overdue.
Most bulls are arguing their outlook by pointing out that the market’s trend, momentum, and breadth are incredibly strong.

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Sector Trading Algorithm

December 10, 2020

The Sector Trading Algorithm makes use of sector rotation based on the strength of markets’ momentum. This algorithm trades 3 markets among 9 S&P 500 sectors and Treasury bonds. We pick the 3 strongest ETFs with the highest 12 month rate-of-change and hold them in our portfolio. We rebalance every month.
Trading Algorithm’s rules
At the end of every month, look at the sector ETFs which closed at a 12 month high. Among these ETFs, buy the 3 ETFs with the highest 12 month rate-of-change. Invest 1/3 of your portfolio’s value into each ETF.
If only 2 ETFs are at a 12 month high, only buy 2 ETFs. Invest 1/3 of your portfolio’s value into each ETF. Invest 1/3 of your portfolio’s value into Treasury bonds.
If only 1 ETF is at a 12 month high, only buy 1 ETF. Invest 1/3 of your portfolio’s

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December 7-10, 2020: market thoughts

December 7, 2020

The following is my stream of thoughts. This webpage will be continuously updated throughout December with new insights.

Sentiment
Nothing changes sentiment like price
It’s been an incredible 9 months for the U.S. stock market, with U.S. indices mostly going in only 1 direction – up. Since sentiment and price rarely move in opposite directions, the stock market’s rally has pushed several sentiment indicators to extremely high levels. As you’ve probably heard of by now, traders are buying call options like there’s no tomorrow. The CBOE Equity Put/Call ratio is near its lowest level in nearly 2 decades:

The Equity Put/Call ratio’s long term average has changed over time. To account for this generational shift, we can instead look at the Equity Put/Call ratio’s 10 dma vs. its 200

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Our portfolio

December 28, 2019

In the interest of transparency, here’s how my wife and I allocate our assets:
20% in various trading models (U.S. equities)
20% in a long term market timing model (U.S. equities)
20% in a buy and hold strategy (U.S. equities)
40% in bond ETFs (to be used for other investments outside of U.S. equities when those opportunities arise)
My wife also owns a construction company, which constitutes a significant portion of our net worth. But since this is a private company, its value is hard to calculate. Hence we have excluded this from our “asset allocation” for the sake of simplicity.
20% in trading models
20% of our net worth is used for trading U.S. equities. We do so entirely with 2 quantitative trading models (split 10% each). We don’t use 100% of our net worth for trading because

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Announcement: BullMarkets.co is now a part of SentimenTrader.com

August 14, 2019

Hi everyone,
I’m excited to announce that effective immediately I will join and publish content on SentimenTrader.com. Jason and his team at SentimenTrader approach trading in a similar way as I do: thorough quantitative analysis that uses historical data to guide future trading decisions.
I will be publishing my “market stats” and trading models at SentimenTrader.com. The format will be similar to what you’re used to seeing here at BullMarkets.co:
Blog posts for market stats
Individual webpages updated on a daily basis for the trading models
This transition will take some time, so please be patient with us during the process. I will probably start to publish market stats on SentimenTrader this week, and the models will be ported over to SentimenTrader over the coming days.

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