Sentiment, breadth, and positioning analysis

Happy Saturday, Traderade family! We've had a big growth spurt in the last two weeks as we brought on Ayesha Tariq, CFA, launched our Discord server as a part of Traderade Plus, and navigate through earnings season. With all that said, I wanted to take some time to dive into sentiment, breadth, and positioning.

In the last week we saw some signs that bearishness continued to fade across many measures.

VIX: S&P 500 implied volatility continued to decline, with the VIX index declining to 23.03 on Friday. Nevertheless, implied volatility remains elevated, as realized volatility for the last month is showing a measure of 20.46 (up 86.90% y/y). This suggests a market that is reasonably well hedged, despite a subdued put skew.

Corporate yield spread: We saw a noteworthy contraction in the spread between high yield and investment grade debt, down to 499 bps (or 4.99%). This is encouraging as it suggests, much like my prior article, that financial conditions have eased, helping to support a variety of riskier long duration assets.

NYMO (inverted): Breadth on the New York Stock exchange has become rather healthy, with sizable upside participation, but nowhere near exhaustion levels.

CBOE equity put/call ratio: On Friday we saw a little bit of concern return to the equity options market, with the put/call ratio rising to 0.73. Nowhere near a true bearish reading, but enough put vs call volume that it suggests participants were a little nervous on what is otherwise usually a "lotto Friday," where high frequency options speculators often play calls on unprofitable growth companies, and elsewhere, to try to achieve outsize gains.

NAAIM (inverted): Fund managers became more bullish last week, allocating into equities as the market moved higher. There's been a pattern of active managers buying rallies and selling declines this year (on an aggregated basis) that suggests some funds are probably experiencing sizable underperformance. Nevertheless, the bullish positioning change does not suggest an extreme.

Rydex bear/bull ratio: Two weeks at 0.10. An elevated level, but nothing resembling an extreme.

The MOVE index, which tracks the implied volatility of Treasury securities options, fell last week. Equity and Euro currency volatility followed lower. Though the MOVE index and Euro currency volatility remain significantly elevated in relation to the VIX. Sometimes this can create a "drag higher" effect, as credit markets and currency markets are enormously important to the global financial system, and one of the drivers of increasing volatility is significantly diminishing liquidity.

The VIX remains in contango post-VIXperation, with the August front month contract priced at 25.58. This suggests that with regards to the term structure, there's not going to be much if any convexity worth exploiting for calendar or diagonal debit spreads vs times when the VIX is in backwardation.

We saw two days in a row of 10:1 up vs down volume in US equities, which is encouraging. During the prior two instances of this sort of breadth divergence we saw the market move higher afterwards in the intermediate term. Whether this time will be different in the context of a bear market, however, remains to be seen. It may just be a catalyst for a more prolific bear market rally.

While we've seen a small uptick in Investors Intelligence sentiment (bulls vs bears), it remains at extremes of bearishness. Both bearishness and bullishness both show extremes underneath the surface as well, which suggests higher levels of bearish positioning and lower levels of bullish positioning. Another factor that can potentially setup for a powerful bear market rally.