Time of Day Tendencies for the US Stock Market

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December Market Tendencies

December Monthly Market Update – Jay Gragnani, Head of Research and Client Engagement, Nasdaq Dorsey Wright, takes a look at the market tendencies for December and what the PTNYSE is indicating.

#TradeTalks: Further Improvement from the Equity Markets #2020Outlook

It’s hard to believe there are only a few weeks left in 2020, and barring a catastrophic meltdown in the market, this year will go down in the books as a strong year. It will likely to be the best since the 29+% returned by the S&P 500 in 2020. The market has seen strong gains thus far in 2020, and evidence suggests that this trend could continue based on historical indicators.

According to the Stock Trader’s Almanac, the month of December is the single best performing month for the S&P 500 Index (SPX) and the Russell 2000 (RUT) (based on data back to 1950 and 1979, respectively). Furthermore, it is the second best performing month for other major market indices, such as the Dow Jones Industrial Average (DJIA) (using data from 1950), the Nasdaq Composite Index (NASD) (using data from 1971), and the Russell 1000 (RUI) (using data from 1979).

Only time will tell how December 2020 will ultimately play out, but half way through, the major market averages have just hit all-time highs.

While December 2020 bucked all of those historical trends, we enter December 2020 on much different footing. The general trends of the major indices are positive and the US Equity market — from a relative strength leadership position — remains the highest ranking asset class. Additionally, one of the more notable indicators we look at is the percent positive trend of the NYSE (PTNYSE), which measures the percent of stocks that are trading in an overall positive trend.

At the end of November, the PTNYSE indicator crossed above the 50% level, closed at 52%, and exceeded the April 2020 high. This is the first time the chart of PTNYSE has been above 50% since falling below in October 2020, before ultimately falling to a low of 26%.

In looking at PTNYSE historically, a reading above 50% has been a healthy sign for the market as it suggests that a majority of stocks are in positive trends. Further, in general, the magnitude of market movements have been much larger to the upside while this indicator is above 50% as more stocks are participating in the rally. In the table below, we highlight the periods of time when the PTNYSE has been above 50% and below 50%, and compare the performance of the S&P 500 over those time periods.

Going back to February 1997 (which is as far back as we have daily data), this is the ninth time the PTNYSE has entered a period “Above 50%”. During the eight periods above 50%, the S&P 500 (SPX) produced an average return of 18%. There were only three negative periods (one in 1999, one in 2001 and one in 2002) where the SPX produced a loss while above 50% for the PTNYSE, and those were also the three shortest lived stays above 50%. On the other hand, when the PTNYSE has been below the 50% level, the average return for the S&P 500 is just 3.66%. So, this is not to say that the market can’t move higher while PTNYSE is below 50%, but historically the magnitude of market rallies have been much greater when the PTNYSE indicator has been above the 50% level.

Dorsey, Wright & Associates, LLC, a Nasdaq Company, is a registered investment advisory firm. Registration does not imply any level of skill or training.

Unless otherwise stated, the performance information included in this article does not include dividends or all potential transaction costs. Investors cannot invest directly in an index. Indexes have no fees. Past performance is not indicative of future results. Potential for profits is accompanied by possibility of loss.

Nothing contained within the article should be construed as an offer to sell or the solicitation of an offer to buy any security. This article does not attempt to examine all the facts and circumstances which may be relevant to any company, industry or security mentioned herein. We are not soliciting any action based on this article. It is for the general information of and does not constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. Before acting on any analysis, advice or recommendation (express or implied), investors should consider whether the security or strategy in question is suitable for their particular circumstances and, if necessary, seek professional advice.

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Dorsey Wright’s relative strength strategy is not a guarantee. There may be times when all assets are unfavorable and depreciate in value.

Seasonal Tendencies You Can Trade with ETFs

An expanding number of ETFs, combined with the computational power to find seasonal tendencies in the stock market, means ETF traders can utilize these tendencies for trade selection and timing. Seasonal tendencies occur for varying reasons, such as an elevated mood heading into Christmas, seasonal changes, or short-term phenomenon such as one day of the week performing worse or better than others [see How To Swing Trade ETFs].

Below we take a closer look at three seasonal tendencies you can use to your advantage.

Six-Month Cycle

Ever heard “Sell in May and go away?” This trading phrase is derived from the Stock Trader’s Almanac disclosure that there is a tendency for the stock market to perform better during the six months of November to April than the six months between May and October. Between 1950 and 2020 the average percent change in the best six months was +7.5%, while the gain in the other six months (May 1 to October 31) was only +0.3% [Download 101 ETF Lessons Every Financial Advisor Should Learn].

Sy Harding introduced a way to trade this seasonal pattern in his book, “Riding the Bear.” The basic concept is to use a MACD to find entry and exit points that align the six-month seasonal tendency. A buy entry occurs when the MACD makes a move into positive territory (above zero line), or the MACD crosses above the signal line near the start of the bullish cycle. A sell occurs when the MACD moves into negative territory (below zero line), or the MACD crosses below the signal line near the start of the bearish cycle.

Figure 1 shows the strategy applied to the SPDR S&P 500 ETF (SPY, A).

Figure 1. MACD 6 Month Cycle Strategy – Weekly Chart. Click to enlarge. Created with FreeStockCharts

Signals may occur slightly before or after the “official” start and end dates of the six-month cycles. The cycle or signals are not infallible, though; sometimes the best six months will not produce a profit, and in other years the historically bearish six month period may outperform the historically bullish six month period [see 5 Most Important Chart Patterns For ETF Traders].

20 Year Seasonal Study of S&P 500

A seasonal study looks at how the market performs in given months over a long period of time. This highlights tendencies in certain months and also highlights different points of the year that are historically favorable for stock purchases or sales. For an in-depth visual analysis of the S&P 500′s performance, please refer to The Complete History Of The S&P 500 Index.

Figure 2 shows a 20-year seasonal chart of the S&P 500. Common high and low points for stocks are marked on the chart.

Figure 2. 20 Year S&P 500 Seasonal Study. Click to enlarge.

This seasonal study also confirms the six-month cycle from the previous section. November through the end of April usually sees more of a rise, while May until the end of October shows a tendency to stay flat over the last 20 years.

While 2020 was a bullish year for the S&P 500, and therefore most buy strategies would have worked, the major high and low points in Figure 2 could still be used to make trades in the Core S&P 500 ETF (IVV, A).

Figure 3. Buy and Sell Based on the Seasonal Tendencies. Click to enlarge.

While the high and low points of the year are approximations, they did a good job of capturing major price swings in the ETF through most of 2020 [see our Visual Guide To Major Index Returns by Year].

Monday Blues and Tuesday Turnaround

There is also a definite pattern to days of the week when tracking the broad market’s performance – some days far outperform others. According to the Stock Trader’s Almanac, since 1980, Monday has been the worst performing day, barely edging out a positive return over this period. Tuesday is the best performing day, followed by Wednesday, and Friday is the third best performer of the week, moving up 25% of the time.

Short-term traders can plan purchases and sales based on this phenomenon. During an uptrend, buying near the Monday close and holding until near the close on Wednesday takes advantage of the depressed prices on Monday, as well as the common jump that occurs on Tuesday and Wednesday. Ideally, long positions shouldn’t be held through the weekend, unless the trend is very strong, or you can hold through the likely sluggishness on Monday. Tuesday has a tendency to be especially strong if Monday was down more than 1% [see also 17 ETFs For Day Traders].

The same approach can be applied when stocks are broadly heading south; when the equity market is in a downtrend, taking short positions on Friday and holding until late in the session Monday takes advantage of Monday’s weakness.

Considerations

These types of patterns have occurred historically, yet in any given year, week or day the tendency may not occur. All the tendencies are based on studies going back to 1950 (or earlier) to the current. Over this period there was an upward bias in the market, which is reflected in the results. Most of these tendencies indicate positive returns, yet that may not always be the case. For example, Tuesday may still perform better than Monday, but during a downtrend all the days of the week may see negative returns [see also A Brief History of ETF Bubbles].

Therefore, seasonal tendencies should never be relied on exclusively, but rather combined with other forms of analysis and risk management to find viable entry and exit points. Seasonal tendencies provide an approximate time window of where trades have a high probability of working out, but each trade still needs to be within risk tolerance levels and if the seasonal pattern doesn’t work out, you’ll need an exit plan.

The Bottom Line

Seasonal tendencies provide a unique view of the market, showing the historical probabilities of certain price occurrences or time. Combined with other technical analysis methods and risk management tactics, ETF traders and investors can use seasonal tendencies to aid in finding entries, exits and choosing the best times to trade.

[For more ETF analysis, make sure to sign up for our free ETF newsletter]

Disclosure: No positions at time of writing.

A Guide to Sentiment, Positioning Analysis, and Trend Analysis of the US Stock Market.

An introduction to my Market Monitor for analyzing and making actionable trade decisions in the most complicated and liquid market in the world.

Intro

When I started as a trader, I started as a small cap trader. I followed the theories of Jesse Stine and Pradeep Bonde. Stine called his setup, the “SuperStock” setup and Pradeep Bonde(Stockbee) called his an Episodic Pivot. I still trade these, but I have added a bunch of my own wrinkles. They are no longer my primary thing anymore. I now trade the indexes primarily, via Futures. My consistency and profitability have skyrocketed. I did well as a small cap trader, but as my account grew I became more and more nervous about having capital tied up in low liquidity names overnight. There is so much gap risk in small caps. Holding through earnings is a scary thing as well.

A lot of people that trade individual stocks, take a bottom-up approach. I can see the idea behind this, but I personally found that in practice that approach does not work as well as a top-down approach. I know some of this comes down to personal preference, but for me having a strong understanding of how the market is behaving is incredibly powerful for both individual stock traders and index traders.

The data I am going to present in this document is data from my daily market monitor. This is the information I track on a daily basis. I have another market monitor, which is much larger in scope, where I track longer-term data. I track a lot of Macro data in that one. I typically update that one once a month.

At some point, I may explain the longer-term market monitor as well. But that will be an even longer blog post. With both of these market monitors, I have devised a point system that attributes a final score based on the readings on all of these metrics. I assign weights to the various metrics. The most useful metrics get a bigger weight score. I then add all the scores together and get a total score. This is all done automatically in spreadsheets. I am not sharing those spreadsheets at this time, I might include them in the book when/if I ever finish the book.

You may think this score is some magical thing that allows me to automatically trade the market with extreme accuracy. It isn’t, in fact, I don’t pay much attention to the score. It is just something I built to try to get a better feel for the data. It is similar to the TV show, “Whose Line is it Anyway” if you have ever seen that. The score truly doesn’t matter that much. I take in all of this info, process it, and make discretionary decisions based upon the data.

Breadth

One thing that I started to do from the very beginning, is to develop my own Market Monitor. I started with the Market Monitor concept from Stockbee and greatly expanded upon it. My Market Monitor is a massive part of the reason I am a successful trader. It is pivotal to every trade I do. In terms of Index trading, it is a critical piece. I combine this market monitor with order flow, and small amounts of TA(mostly Fibs) to trade ES.

It is a system that works well for me. I honestly have not been highly interested in sharing this, because it does work so well. But, I believe in helping people. Many are struggling with things that do not work, paying outrageous amounts of money for paid courses where they teach you how to draw trendlines, and being led down the wrong path consistently and getting burned. I feel it is my duty to help them out. I am offering this for free, just like everything else I have done in this blog because I think it is the right thing to do. I make money trading, and I enjoy writing. I have not monetized this blog other than a few affiliate links from time to time.

The Stockbee Market Monitor is based entirely upon Market Breadth. It is still my favorite way to monitor market breadth. A breadth thrust signal on there is probably the best way to use Breadth, although Breadth Divergences at highs and extreme overbought and oversold breadth are useful as well. The breadth thrusts are 300+ stocks up more than 4% on the day. In 2020 we have had 4 of them. You can see the returns from the first two have been phenomenal. From the third, they have been great so far. We just had our fourth this Friday, June 28.

Other things of use in that Breadth Monitor are the 5-day ratios. Extreme overbought and oversold is what I use them for. Stockbee in general likes to use them as strong 5-day breadth is good and bad 5-day breadth is bad. More often than not, when his spreadsheet colors them green, it is a short term sell signal, red a short term buy signal. I personally have taken his sheet and changed how the color highlighting works in certain areas. This is in part personal preference, and in part, due to some backtesting I did on the data.

I highly recommend reading the blog posts Stockbee has done where he explains his Breadth Monitor. From there go back and look at major inflection points and see what the numbers were doing. Start “forward testing” it by observing it every day. One big thing about my Market Monitor is that I have had a bunch of different metrics on it over the years. I backtest some of them and forward test some of them. If I find through forward testing that they have little value, I remove them. I try to streamline it as much as I can, but there is nothing that beats looking at the best data every day and getting an in-depth feel for how the market flows. That is the true key IMO.

The number of stocks up 50% in a month is a pretty solid short to medium term top indicator. Very often we see a pullback when this gets above 20. When it gets really low it can also be a buy signal, but the best signal is above 20 is a time to get cautious.

T2108 is an indicator that is in the Worden Brothers platform Telechart. It is similar to something like MMFI in TradingView or SPXA50R in Stockcharts. In general, I look at the extremes here. Extreme overbought for a long period of time can be a sell signal, Extreme oversold(usually takes less time than overbought) is a buy signal. Breadth divergences are something to watch here as well, which can be a top signal.

Similar to T2108 I like to look at the comparable 50 day moving average breadth charts on SentimentTrader.com for SPY, QQQ, and IWM. The way I look at the data is similar to T2108. Extreme OB/OS, Breadth Thrusts, Breadth Divergences.

As far as the breadth Oscillators, I personally am a fan of the Nasdaq Mcclellan Summation Index. Nasdaq is a leader in many ways due to its heavy tech weighting. I like to watch for extremes OB/OS as well as the “NASI Buy/Sell Signal”. The NASI Buy/Sell signal often lags way too much for my liking, but it can be nice confirmation if already in a trade to stay in.

There is a myriad of sources online for how to use breadth and a million different measurements for Breadth out there. I am not going to start from ground zero and try to teach you everything there is to know about breadth, I simply am telling you the nuances of how I use it. It is a powerful tool, but only one part of my Market Monitor. It is not the MOST powerful tool either.

Commitment of Traders

The COT Reports for Equity Indexes do not cover as large of a subset of the market as the COT for the many of the commodities markets. Nevertheless, it still gives solid signals. It is an underused resource.

There are a lot of places to learn COT in-depth, and a lot of ways to view the data. My personal favorite place to view the data is Freecotdata.com. If you want to learn more about COT, his interviews are a great resource. The owner of this site adjusts the COT data for OI and the percentile rank over the previous 5 years. This is a great perspective, and different from how many people are viewing the reports. He lumps all of the speculators into one category, along with dealers. In general, amongst the speculator’s group, you will find a percentage of them are the people that can consistently make money in the market. The group as a whole is primarily made up of trend followers. The longer a trend goes on, the more involved in that trend they tend to get.

A lot of people call Dealers “Smart Money”. While it is true that the Dealers are often heavily long at lows and heavily short at highs, the dealers are not in the market to make money, they are largely hedging. It is a great signal when either Dealers or Speculators get heavily long or short an extended trend. You will notice that in general, the two categories move inversely to each other. Dealers are Market Makers, brokers, etc. hedging and trying to stay market neutral to offset the risk from speculators. So extremes are an important thing to watch for in the COT.

COTBase.com is my preferred way to look at the “classic” or “legacy” version of the COT report. There two types of reports put out every week by the CFTC. The legacy and the newer disaggregated report. They both present the SAME data, it is just the newer report that breaks the data down into more categories. I like to look at both reports every week.

Another element of the COT reports to watch is the weekly changes. A large one week change in OI can be a big deal in the short term. Freecotdata.com is a good resource for this, but COTBase.com is also an excellent source. If you watch his weekly videos, he will show you the biggest one-week changes in OI and the major extremes. The videos are a good way to learn more about COT as well.

A third and also great resource for COT data is Tradingster.com. This gives the full disaggregated report, versus the combined version that Freecotdata provides, plus Tradinster is usually updated immediately. Freecotdata is usually not updated until the following week after the report releases.

As with anything, I am not here to try to teach you every single detail about COT. I suggest you do as I did, read books, read blogs, watch videos. I already linked some resources, there are several books written exclusively about COT. Google is a great resource. I am just showing you the nuances that I look at, not the basics of how to read and use them.

For Equity Indexes, I, of course, look a the index COTs but I also pay attention to the VIX, US Dollar Index, Gold, Bonds, etc. I want to see what the markets that have a strong positive or negative correlation to the stock market are telling me. Risk-off and risk-on asset analysis. Obviously, Gold COT is not as critical as the Equity Index COTs for my purposes, but there are sometimes some clues in these ancillary COT reports. In August 2020 gold speculators hit a record short interest level. This formed a major bottom in Gold and preceded one of the larger drops in Equity Indexes in many years by several months. Was it a warning sign, or a canary in the coal mine indicator? Perhaps, but correlation and causation are always hard to determine. The Gold correlation with the Stock indices is not as strong historically as many think either. But was it good to know that was occurring as an index trader? Yes of course. Plus, it made for a great place to get long Gold as a side trade. As noted from a previous post, I love trading major long term COT extremes in markets.

Basic TA on the Daily and Weekly Charts

I am not the biggest fan of TA. It has some use, but way too many rely way too much on TA. I can’t tell you how many people have told me that I don’t need to look at all this data, that this is going to give me analysis paralysis, and all I need to do is read the charts. All the information is contained in the charts they say. That would make sense if the ways these same people are analyzing the charts actually had a backtested quantifiable edge. The reality is, none of these people have backtested these candlestick patterns to see if for instance a “bullish engulfing” candlestick actually has any predictive power.

I mostly like to use charts to determine two things. At a basic level, based on historical norms, are we extended to the upside or downside on a short, medium, long term perspective. Yes, this is to some extent subjective. Yes, I just got done talking down to people who do a subjective analysis of charts. But…If you go back to a previous post of mine, where I talked about my favorite trading follows, I talked about how I love to do backtesting and read others backtests. This gives me at least an idea of the real nature and tendencies of the market.

A lot of people like to do visual backtesting of charts. I admit I do it too, at least when I first begin to analyze a set of data. There are issues with this. First, the human mind is designed to find patterns, even when patterns do not exist. You might think you see certain things, but the reality might be different when you do actual, structured, backtests of the data. Try not to fall for this trap.

Back to TA. Having seen 1000’s of backtests, many of them price action-based, I get a feel for what is a move that might fade and one that might continue for a bit longer. I have spent a ton of time looking at the price action tendencies during different market environments. Unfortunately, some of this has to be done in a rudimentary way, some of it can be automated. But in general, ES has a few different “modes”. The default mode is a slow grind higher. This is what produces a market that for the entirety of its existence, usually pushes new ATHs most years, and usually does not go more than a few years without a new ATH. This is a huge edge, that few take advantage of. Yes, when the bear markets come, the fall is vicious. But if you maintain net long exposure 80% or more of the time in this market you will come out ahead. The beauty of Futures is you can add a lot of leverage to that equation. Leverage is very much a double-edged sword. I would not recommend trading Futures or doing so with very small size until you have a firm grasp of the dangers and pitfalls of leverage, as well as a firm understanding of the information I am presenting in this blog post. It is learning when the corrections are becoming high probability and either going flat, or net short that you can really destroy the average market returns.

So for the default slow grind mode higher, I have found two TA tools that help me the most. Keltner Channels and Linear Regression Channels. Once you identify the trend is likely shifting to slow grind after a correction, then you can start to fit a linear regression to the resulting angle of the trend and use that for trading. You can hedge your longs near the top of the channel, or go with small size net short positions. Touches of the bottom channel are usually strong buys, as long all of the other data I am presenting here is showing the uptrend is still likely intact.

For Keltner Channels, middle bands and lower bands can be good buys. This is where order flow can come into play to confirm these levels. The “middle” Keltner channel is just a moving average. In my case the 20period mA. I am in general not a huge fan of using moving averages extensively in market analysis. But, it is a majorly watched average, and in an uptrend, the market will spend most of its time above it. It has to, there is no other way for an uptrend to exist. so touches and moves below can be buying opportunities. I would never, ever, buy a moving average blindly without the other data I am using and presenting here. I find when a market is “extended” from the 20 daily ma, that is a better signal than when it is touching it. Simple mean reversion.

For those that are interested, these are my Tradingview settings for Keltner Channels. They are based on the Adam Grimes recommended settings. Whenever possible, use ohlc4((open+high+low+close)/4) with indicators. It gives a better overall picture than just using the close.

I also am a fan of using Fibs. I used to be one of the many who think they are ridiculous. But after seeing countless examples with my own eyes of live and historical exact Fib bounces I am a believer. I could go through the process of posting hundreds of examples, but I am going to leave that process to you. Again, there are a ton of resources to learn Fibs. I am not going to try to teach you every single nuance of Fibs. Just know that I find them useful. Since you are a human, and like pretty pictures, here are two exact fib touches on lower time frames from trading earlier this week.

As I stated before, order flow can be great when watching these levels. I think much of the reasons these work in the modern era has less to do with this “magical” Golden ratio everyone talks about and more to do with the massive dominance of algorithmic trading. There is no doubt in my mind, there are swarms of algos operating on Fibs. Order flow works wonders in conjunction with these and having watched order flow at these levels many times, you start to see various patterns that repeat over and over again and ultimately give you the confidence to get into trades with them.

The funny thing about the Golden ratio is there is absolutely not a magical thing. People believe that this ratio repeats over and over again throughout nature and that is why it works. The reality is, fractals of the golden ratio do repeat in nature very often, but more often than not they are not the Golden ratio. There are a ton of ratios in nature. There is a silver ratio, bronze ratio, and countless others.

Long story short..The Golden Ratio works in trading, because a lot of people believed enough in it to build algos, and enough human traders believe in it to make it a self-fulfilling prophecy. I personally, would never trade on a Fib or any TA level blindly. I always want to see confirmation in order flow. Without watching order flow, you might get in one of those situations where your limit order gets absolutely blasted through when a market moves through one of these levels like they do not exist.

The other market environments besides the slow grind environments, primarily encompass the high volatility moves found in corrections and bear markets. Many of the same things work, but you have to account for the high volatility. Pay close attention to the GEX during this time. I explain the GEX later on. Study past price action during corrections. It is helpful to know that the stock market averages 2–3, 5–8% corrections every year. Every time, the world is ending if you pay attention to what people are talking about on social media.

The data that I track will be changing rapidly during these corrections. It is important to monitor it very closely, especially the DIX. During the slow grind periods, I do not watch it especially close every single day unless I think we are getting closer to a correction. Everything is relative, you have to maintain an open mind and be flexible.

SPY Max Pain 9 Expiration Average

On a day to day basis the various put/call ratios that exist, can give good short term signals. I do pay attention to them. A really high or low one day P/C ratio can cause some short term highs/lows to form. It is important to note that certain events can skew this data in the short term. Major economic releases, fed announcements, opex, etc. But, it is useful to pay attention to the day to day ebb and flow of this data.

However, I have found the overall OI of each contract gives a better picture of the long term picture. On actual OPEX days, there is a strong tendency for the market to seek gaps in the OI to move to at the close. I have observed this many times. My assumption is this is market makers trying to get as neutral as possible, which results in the market moving towards these levels. Some think it is market manipulation. That is possible as well. I don’t claim to know the exact reasons why it happens, I just know it happens.

The weekly options expirations are not that critical to watch, but the monthly Opex every third Friday, and especially the triple/quad witching dates are critical days to be watchful. Volatility is very common on these days. Futures contract rollovers can cause some volatility as well, and they will have a big effect on Delta when watching order flow. Delta becomes less useful/reliable during a rollover period.

How do you get this OI data? I prefer Opricot.com for SPY and SPX options. For ES Options expiration data, CME is the place to go.

So for short term trading, this is useful, but what about the long term? What I do is take the max pain levels for the next 9 Option Expirations for SPY from Opricot, average them out, and compare them to the SPY close. This gives a good view of the longer-term picture of the options OI. I subtract the SPY Close from the average max pain level. Negative numbers mean the average max pain level is below the close, positive the opposite obviously. Big numbers negative or positive, can mean we might see some mean reversion. This is what I watch for the long term.

Why do I use SPY? The SPY options chain has by far the most daily dollar volume transacted versus the other two options chains, index and futures. You could get really wild with this and track all the other two chains as well as the other indexes options OI. But the S&P 500 is the biggest dog by far. It is easier and more convenient just to track it.

Insider Ratio

It is no secret the insider buybacks have been a fairly significant boost to the stock market over the last few years. There is contention amongst many for sure about this, but there is decent evidence on the side of buybacks having a big effect. So monitoring this data, at least for now, I think is important. So I do.

There are “buyback blackout” periods as well. This is during the earnings season. There is some evidence that companies have found ways around this blackout period. There is also, IMO, no real correlation to blackout periods causing market declines. This could be due to the aforementioned ways the companies have found to continue buying back stock during the blackout, as well as the earnings reports causing organic buying during this period.

I get the Insider Ratio from Helene Meisler on Twitter, who posts it weekly. She is a great follow. See my previous post for other great follows.

The usage of this data point is straight forward. Above the bearish line and below the bullish line.

Weekly Fund Flows

Backtests on this data are mixed, but nevertheless, we have seen a massive outflow from equities at the time of me writing this. That is why I track this weekly when it comes out. It comes out on Wednesdays. Sentimentrader also has this data. Sentimentrader has all the data out there in one convenient spot, but all of the data on his website is available in the public domain for the most part except for the Smart Money/Dumb Money indicator.

The last time we had outflows this strong this near to ATHs was the Summer of 2020. The last time it happened, the result was a massive bull run. I don’t necessarily think we get a repeat of that now, but it is difficult to look at this is a bearish manner. I think this is really a result of people that have been watching the plethora of documentaries about the 2008 financial crisis and it is currently affecting their judgment. Everyone wants to be the next guy to land the next “Big Short”. While there are some very concerning macro developments in the long term, my current view is many people are a bit early to race for the exits.

Market on Close Orders 5 DMA

There are some that say the traders trading at the end of the day are more likely to be in the “smart money” crowd. My personal view is that is a bit of an outdated idea, but maybe there is still some relevance to it.

What I do, is track the daily MOC ratio as well as the 5-day moving average. In general, more buy imbalances than sell imbalances in an uptrend is normal, same for a downtrend. When you see a divergence, this when you might be noticing a shift in the market and where it can be useful. Incredibly large one-day ratios can also be notable.

I have often seen a capitulatory type of selling at lows on the MOC. If this capitulatory selling is followed the next day or a few days later by a breadth thrust and a large MOC buy ratio, that can confirm a low. Tops are similar, but tops form much differently than bottoms. In general, it takes longer and takes a longer period of people being excessively bullish.

The market on close orders can be found at Market Chameleon.

ES Long Term Order Flow Delta

In Sierra Charts I have built a long term chartbook that plots a longer-term view of ES, and the overall trend in Delta. Cumulative Delta, as well as Delta at Price, can be used to help pinpoint potential areas of a major high/low forming. A divergence on CVD on a long term view can be a very useful thing. If the price is going down, but CVD is beginning to turn up after an extended period of going down, which can potentially help to form a bottom.

Delta at price on higher time frames is great for seeing exact levels of longer-term absorption, and where aggressive traders are getting trapped. These levels can be critical levels that can act as major support/resistance levels.

I also like to look at the Delta from a consolidated tape perspective. I look at the large orders, medium, and small orders on a longer-term perspective. I also look at these metrics from a short term perspective. But is the long term perspective that can give you some clues. The consolidated tape is something that is not available with every data provider. I highly recommend getting a data source that has both the full market depth and a true reconstructed/consolidated tape. A truly consolidated tape has the ability to combine market orders by trade ID. This is a super useful feature.

Also, I try to every so often check NQ. NQ is the big one, but YM is also to some extent useful to track. RTY is the least useful to track. Also, in Sierra Charts you can track Delta of SPY and QQQ. I find them useful to look at every so often. DIA less so, and IWM is less important to watch IMO. Overall, ES is the most important to watch, with NQ, SPY, and QQQ being useful to look at on occasion.

ES Inventory Balance

This is an observation that I made, and another way I have tried to look at Order Flow in an outside the box way. I have found and been able to pick several exact lows using this. The premise of this is that markets tend to move towards high liquidity. So what I look for, is large static orders that sit in the order book for a long period of time. In general, I am looking for bids when trying to find a low and asks when trying to find a high. If I feel a market is topping in the short to medium term, I look for these levels as potential targets. I have found, that very often, these levels end up being within 10 points of the lows. Usually, the market will not trade much more than 10 points past that level. Very often, they do ultimately get filled.

Trying to explain this in words is incredibly difficult because this is a very subjective thing that I do. But, basically, I look for these large static levels and plug into a spreadsheet daily. I then calculate a ratio of to see which side has more total quantity of these walls. That can be a useful metric as well. If this positively correlates with the next metric, that can be a very powerful signal. The next metric is the total book depth. So if there are more large bid walls, and the total depth is heavier on the sell side, that is a decent sign that we might be heading lower.

These large walls that I plug into my spreadsheet, are often well over 1K contracts in size. They are very often found in gaps. Gaps have a strong tendency to eventually fill in markets. So if you find a large order that stays, and is in a gap, there is a decent chance that could be a very important level.

On this recent correction, I was looking at that level as potentially the deepest we would retrace. I held a short from near the highs, closed at 2800 and tried a long as I began to see some evidence we would hold that level. Trim and Trail gave me a profit on the bounce, but ultimately the market explored lower prices. I was still looking at order flow for long entries, and no longer looking for shorts actively. It is a tough game to try to catch lows, but if you use sound risk management and have a solid understanding of the market dynamics it can happen. You have to be prepared to trail stops and let them take you out. If you get good entries on short term oversold with good order flow confirmation at those lows, you can do it in a somewhat safe manner. BUT…The safer way is to wait for the lows to be confirmed with a Breadth Thrust. If the breadth thrust is confirmed with dark pool buying, before or during the breath thrust, you can then look to buy pullbacks.

ES Ask-Bid Ratio

This is a study in Sierra Charts that monitors the total book depth. I have three charts with this on it. Each monitors different depth levels. Close, medium, and total. In general, more bids than asks is a good thing. I often see all three depth levels have more asks than bids at major highs, and inverse for lows. If the overall depth is showing more bids, but the close depth level is more asks, then there is a decent chance there is some spoofing going on near price to try to get some bids filled. There is a lot of nuance to using market depth, and it would be hard to explain all of that nuance. With order flow, you have to get in there and look at it. A lot of it cannot be explained.

In my next blog post, I intend to put together an exhaustive list of all the free or inexpensive resources to learn order flow. Order flow can complement ANY strategy that you use. In general, order flow gives short term signals, but I have shown some ways you can look at the bigger picture. Another way to use order flow is to look at the short term signals. When a lot of short term signals stack up in a row, it can change the higher time frame trend. It oftentimes takes MANY, HEAVY absorption events often at sequentially lower/higher prices to stop a strong higher time frame trend. These absorption events will force a short term pullback(rotation) often, but many times you will see price continue higher/lower after a small pullback. If absorption events continue to pile up, you can eventually have a trend change.

Gold and Bonds Inventory and Ask-Bid Ratios

This section I can keep really short. It is essentially the same thing as the ES Order Flow Analysis from above. It is just monitoring the same things for the risk off assets. Enough said.

CNN Fear and Greed Index

This is a contrarian signal. Sentimentrader.com has a model similar to this that is better in many ways that I actually prefer to use. This indicator is based on primarily positioning of traders versus anecdotal evidence like a small sample size survey. I like AAII and other surveys, but someone can be positioned one way, and vote differently on a survey. Positioning data is more accurate in many regards, plus it covers a wider swath of the market. AAII is a limited sample size.

Just like COT, one day large moves can matter here. But primarily I am looking at extremes. It is important to note, that in equity indexes, the way tops and bottoms form is completely different. Bottoms tend to form very quickly and are marked by rapid declines in sentiment to extreme bearish levels. Typically, extreme bearish levels do not have to be reached for long periods of time to form a bottom. Tops are formed after weeks/months of a bullish extreme in sentiment. This is as of now. In a longer term bear market/recession this will be reversed to some extent. Bear markets are highly volatile, so local tops and bottoms both form faster, but it obviously takes longer for bottoms to form and more extreme and drawn-out sentiment readings. This is part of the adaptability part of trading.

Citi Panic/Euphoria Model

This can be used very similarly to CNN FnG. I personally find Citi Panic Euphoria to be even more reliable. Euphoric readings on this are a big warning sign. It doesn’t give extreme readings nearly as often as CNN FnG so an extreme reading here matters a lot.

Where do I get this weekly reading from? Helene Meisler of course.

AAII Bull Ratio

Similar in many ways to the previous two. There are many backtests out there for this data. OddStats, Sentimenttrader, Troy Bombardia, and many others have published a ton of them. CNN FnG has a lot of published backtests out in the wild as well. I’d take the time to find them for you but frankly, if you do not know how to use Google you will have a hard time in this world.

Same thing here. Extremes and big one week changes. I include this one as a standalone metric because it is so popular and widely watched. However, the next Sentiment Survey metric is better as it aggregates multiple sources. Better sample size. As a result, I do not give this a ton of weighting, the next one gets more weighting.

SentimenTrader AIM Model

This aggregates many different surveys. AAII, Investor’s Intelligence, and many others. Better sample size, in general, equals better data. The data is used in the same way as AAII, but I give it more weight.

Monthly Fund Manager Survey Z-Score and Hedge Fund Exposure

This is a positioning metric that I find really helpful. It is more akin to COT than the sentiment gauges. As such, the data is used in basically the same way. I get this data from Urban Carmel’s blog.

Many are under the impression that fund manager’s are smart money. The reality is backtesting shows that when these guys are heavy cash and light on equities exposure the forward intermediate-term returns for the stock market are above average. The inverse is true as well.

Another source for similar data is called “Hedge Fund Exposure”. I get this from Sentimentrader.com and Hedge Fund Research is the group that compiles it.

Small Sidetrack before we get back to the rest

Sidetracking a bit, but this one of the things that get people trapped over and over again. They try to follow the smart money by mimicking the positions of these guys.

Here is my rant on retail traders trying to counter trade retail traders:

I see this same thing all the time. Retail traders constantly talking down about retail traders and trying to counter-trade…retail traders. I am a retail trader…100%. I personally try to figure out what the smart money is doing. What dumb money is doing, I pay less attention to. They are all over the place. Smart money is more consistent. Another thing…Institutions are not necessarily always smart money. They get caught offsides all the time. That is actually when the BIGGEST edges can form. When Institutions get caught on the wrong side. Smart money is a dynamic group of actors. Not every top and bottom is formed with the same group of people. I have sometimes been on the smart money side, sometimes not. That is how everyone in markets is, unless they have a really reliable source of inside info, or have a market completely cornered.

This and the ultra-contrarians who want to fade EVERY SINGLE big move. Contrarian isn’t bad necessarily, I am a contrarian in many ways, but you have to really be smart about it and really be great with risk management if you are trying to time major bottoms/tops.

Another thing is the PERMABear and PERMABull mentality. These are all traits that are not going to allow success. Adaptability is critical.

Sentimentrader.com Smart Money/Dumb Money Indicator

I am saving the best two for last. If I was to rank all of these in order of my top 5 most reliable metrics on here, I would go with:

  1. DIX
  2. SM/DM
  3. Order Flow
  4. COT
  5. Fund Manager Survey Z-Score

The SM/DM indicator is only available to subscribers of Sentimentrader.com. You can usually find people posting this for free on Twitter. It is a proprietary indicator, but what I can gather is it combines many of the things I have previously mentioned. It essentially is combined 100’s of different sources of positioning and sentiment data to formulate the numbers for Smart Money and Dumb Money. I personally track the actions of Smart Money much more closely and give them more weight. Dumb Money is…less reliable. Why do I say this? You might have guessed it…backtests. Yes, Jason Goepfert of Sentimentrader has shown backtests, and you can even run your own backtests if you are a subscriber that shows that Smart Money is just more reliable. Dumb Money is not irrelevant, but just should be given less weight.

This data should be used the same as the previous sentiment metrics. In a bull market, it typically takes SM being bearish for an extended period of time and only takes them being bullish for a short period of time. If we do get an extended bear market, which is a growing possibility, then you will want to look at this in a different manner.

It is important to note, that during the financial crisis and for a few years afterward, this was giving tons of false signals. It is hard to say what caused this, but I think it has a lot to do with the unprecedented moves by the Federal Reserve to support the markets with absurdly low interest rates combined with Quantitative Easing. Jason Goepfert acknowledged this and made a post that explained he had made some major changes to how the data is calculated. Since he did that, the data has been really reliable. That is why this is my number 2 most valuable data point.

SqueezeMetrics DIX and GEX

The DIX is my favorite and most reliable indicator by far. The DIX is dark pool buying/selling. I highly recommend reading the documentation and white paper. The backtest results of the DIX greater than 45% are incredible, and possibly the best backtest you will see anywhere.

From the white paper:

Very high relative percentages (≥45%) of dollar-weighted short volume are associated with mean 60-market-day returns of 5.3%, as compared to a mean of 2.8% across the whole dataset.

Squeezemetrics says the DIX is not necessarily super predictive for long/medium-term sell signals, but I track a 10 day moving average of the DIX. A month or more of heavy DIX selling is usually a bit of a warning sign. The market can continue higher, but risk: reward is not as favorable IMO. Extended periods of dark pool selling combined with Smart Money being below the bearish extreme level…is not a good sign usually for an uptrend.

GEX is different. GEX is not necessarily something that in and of itself causes tops/bottoms. GEX really just acts as a braking mechanism or accelerator. High GEX causes the market to strongly mean revert and overall daily ranges/realized volatility will be much lower. Low GEX is essentially the opposite. High GEX is very often seen at local/medium-term tops and low GEX at lows. This, IMO, is more correlation than causation. DIX and SM are more likely the be what formed a major bottom or top.

I would highly encourage you to read the linked documentation above. But here is how I understand GEX. As volatility dies down, which is common in uptrends in equities and a majority of markets, people try to leverage up more and more to account for the lower volatility. To do this, they buy deep OTM options. Which provides Gamma Exposure on the long side. OFTEN times Dealers(market makers) are on the other side of these trades. So they are inherently vulnerable to large price swings. They have to hedge to offset this, anytime the market moves they have to buy/sell underlying to get back to delta-neutral.

Putting it all together and the scoring system

As I stated before, I do give all of these metrics a score and weight, which does give me a total score. I have not perfected this at all, and as I said I don’t pay a tremendous amount of attention to the total score. But, what I have found is tracking all of this data every day, while a bit boring, can give you a great sense of how all of this ties together. It can greatly increase your awareness of the market, and over time you get a feel for what the market might be doing. There is no shortcut that will instantly make you understand or be able to use this in an actionable way. Many say this kind of analysis is too complicated, and that you should keep things as simple as possible. I tried that. This, IMO, works better. Why disregard useful data, for simplicity’s sake? Why not use a useful tool if it is available to you?

I do get the logic behind K.I.S.S. and where I can I do try to do that. I have added and subtracted many things from my Market Monitor over the years. If something has little value and is either a distraction or takes my view away from the big picture, I remove it. In general, when looking at a new metric, I backtest or find backtests of it first. Then I track it for at least a month, if not a lot longer before I add it full-time to my market metrics. There is absolutely no substitute, IMO, for watching this data every single day live as it is being printed. It has changed the game for me, and I fully believe it can change the game for you.

Opening up the Discord again…

I started a Discord server a year ago or so. I ended up closing it, for several reasons. One, I am not a paid Furu. I offer my knowledge for free. I ended up getting bombarded with questions. This is hard for me to understand as I have found answers to almost every question I have ever had on my own. I have avoided asking a ton of questions of others for the most part. Finding the answers to things on your own is how I accumulated the knowledge that I have. Finding your own answers is the only way in some cases to really understand a subject.

Also, I am naturally an introvert. I spent most of my trading career not talking to any other traders. I prefer it that way. But, a number of people have asked me to open it up, so I will open it up. I will ignore dumb questions. If that offends you, I don’t care. If you cause problems, I will ban you. If I get annoyed by enough people I will close it down again. That is easy to do when you are not paying me. I have no obligation to keep the room open. There are plenty of paid rooms you can join that will answer your questions with generic, largely useless and many times inaccurate information. If you want to throw your money away like that, you are welcome to do so. If you want a free room that has quality discourse, then respect the rules.

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