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More institutional selling, elevated sentiment, improving manufacturing

Summary:
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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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:

More institutional selling, elevated sentiment, improving manufacturing

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:

  1. September 2012: this occurred at the start of a -11.9% correction
  2. June 2014: the NASDAQ rallied another +6.9% before it fell -8.4%
  3. July 2015: the NASDAQ fell -13.9% correction immediately
  4. June 2016: this occurred at the start of a -7.5% decline

Elevated Medium Term Sentiment

The stock market’s sentiment remains high according to my Medium Term Sentiment indicator. Sentiment never fully had a chance to washout since the stock market’s bottom in March 2020. Medium Term Sentiment has remained above 30 for almost 9 months!

More institutional selling, elevated sentiment, improving manufacturing

This is an extremely long period in which Medium Term Sentiment failed to washout:

More institutional selling, elevated sentiment, improving manufacturing

Incredibly high & persistent sentiment is the same as extremely strong momentum. It may be a short term bearish sign, but longer term it usually led to more gains for stocks:

More institutional selling, elevated sentiment, improving manufacturing

Improving manufacturing

The manufacturing sector continues to improve as vaccines are starting to be distributed globally. This sector typically collapses during a recession & stock market crash, then rebounds along with the economy and stock market. As a result, it’s a coincident indicator:

More institutional selling, elevated sentiment, improving manufacturing

When Industrial Production rebounded this much in the past, the stock market’s returns over the next year were not universally bullish. Much of the market’s gains had already been booked while the manufacturing sector improved.

More institutional selling, elevated sentiment, improving manufacturing

Conclusion

  1. 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.
  2. Medium term traders should go neither long nor short.
  3. Short term trend followers should continue to ride the bull trend because no one knows exactly when it will end.
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