The commercial traders in the S&P 500 Futures markets made an extreme move last week … the kind of move we rarely see.
They went from a bullish extreme to a near bearish extreme in a single week. Take a look:
Not so fast … sentiment based indicators aren’t always what they seem. Sometimes even the market insiders rush over to the other side of the boat too quickly.
This chart shows a couple of the more recent instances of sharp sentiment drops by S&P commercial traders:
In fact, I went back and looked at other extreme moves in S&P commercial trader sentiment from the past 30 years. There have been less than 10 such moves in the past 30 years. Here are all of them on a single chart:
The following table shows the percentage gains in the S&P 500 1, 3 and 6 months after the sentiment signals.
1987 was the granddaddy of all such sentiment drops. In August 1987 the S&P commercial traders went 99% of the way from bullish to bearish in a single week (as measured by the distance between the two red lines):
So … we’ve just experienced an extreme move in S&P commercial trader sentiment. 7 out of the 8 times such moves occurred in the past, the markets have disappointed the neo-bears by continuing to march higher … but once, the neo-bears nailed it – big time.
The bottom line here might surprise you.
Commercial traders are often called the “smart money.” Betting with them can pay off in certain markets. But in this case, the historical evidence shows that when they make a quick bearish shift, the market usually ends up higher six months later.
On our “weighting of the evidence,” this indicator goes on the bullish side of the scale. But it’s definitely time to check in on your portfolio and mind your stops. The one time this indicator was right was pre-crash 1987.
Richard M. Smith, PhD