Slow Day Discussion

I want to bring to the forefront a discussion that has been going on in the comment section of the blog on an ongoing basis. I am of the belief that money flows move the market. Looking at recent data:
  • There has been a steep rise in margin debt.
  • According to every survey I have seen equity allocations have been rising.
  • Short interest has declined to levels not seen since 2007.
  • Put/call data and the VIX point to a very unusually large proportion of money going into calls.
All the data that I look at point to money flowing to the long side and it is no surprise to see that the markets are higher. The reason I believe tracking this data is important is because once the crowd is already positioned aggressively in either direction, than there is little left to fuel a continued move. It is this data that had me aggressively long this Summer and this data that now makes me cautious.

There are assumptions that I am making. I assume that surveys roughly reflect what people are really doing. I assume that a preponderance of calls being bought means that people are bullish, even though some call purchases can be paired with a non-bullish position. There are other assumptions that go into this method. But that is the reason I use a lot of data and when it is all pointing in the same direction I have found it to be correct. Nothing is perfect.

Some readers in the comment section are suggesting that the "aggressiveness of buyers" is what moves markets and that money flows do not matter. They offer no definition of "aggressiveness of buyers" and no way to measure it.

11 comments:

Anonymous said...

I do not necessarily disagree with anything you wrote there.

Semantically I would just say that there is no NET money flowing into the market, for every buyer there is a seller.

What is happening is some people are moving their individual money into the market while other people are moving their individual money out of the market.

Markets find their clearing levels. At any given instant the buyers and sellers are matched. As buyers or sellers enter the market that clearing level moves, but the buyers and sellers are still matched. At any given price level if there are more buyers than sellers the price must go up or the market will not clear.

Tracking sentiment and so forth is just a way to predict who will be more eager in the future, buyers or sellers.

JD

Anonymous said...

it's really not so difficult. you have longs who are not fearful.. Stock is in strong hands who bot the august low amidst the fear of a double dip. the weak hands never got an opportunity to buy after the bottom because the market never corrected. Had it done so in Nov. in any meaningful way, there would have been some transfer of stock into weaker hands. Stock is still currently held by strong hands. sentiment data works wonders when stock is held by a blend of weak hands so oftentimes a secondary hi after a correction almost always signals an intermediary high.

The topticking short community which has actually been RISING the past 6 weeks are those who have been bearish from the summer or those experiencing opportunity cost of not being involved on the long side. Their activity is not captured in sentiment data because most of them cover by EOD which helps drive down short interest. Either case, they are in pain and by definition, THEY ARE the herd!

Tsachy Mishal said...

How do you know that the shorts are buying and covering the same day? Weak hands/strong hands? How do you measure that?

Until I hear a clear theory with clear examples of how it can be measured, I have said my peace on this subject.

Anonymous said...

Until more people decide to short and not cover intraday as the weak shorts continue to do on the very first uptick, we climb higher. Seasonality is bullish in Dec because there are skeletal crews on trading floors and the "agressive buying" comes from short covering and blind funds picking longs everyday.

Anonymous said...

How do you know a man is a man and not a woman? You just get a feeling of that.. no need to bring out a ruler.

Anonymous said...

Tsachy, you can speak to a risk manager at a trading firm. They can attest to the fact that most traders have been trying to toptick for the past month. Not sure you can purchase this info.

Anonymous said...

An interesting observation over the past 5 years. With the introduction of direct access trading to the public, most of the retail crowd have transformed into what they refer to as "the professional short term trader". Which is basically a daytrader who deposits capital, gets leveraged and then trades frequently. I've seen auditoriums filled across the country with legions of these wannabes learning everything from technical analysis, elliot wave cycles and sentiment. The pitch is that investing is always a losing proposition and trading is certainly the way. Interesting that statistics will point to outflows in funds which paints a picture of public non-participation. However, I disagree. I believe they merely transformed into a different kind of participant.

The grail is open interest data captured at these new broker dealers offering direct access.

Anonymous said...

"Until I hear a clear theory with clear examples of how it can be measured, I have said my peace on this subject."

You have an objective system that allows you to trade profitably enough to do so as a full time job. I agree, you should stick with it. I don't think anyone is suggesting otherwise.

What Warren Buffet and I are talking about is much more subjective. If I were you I would still check out Hussman's papers, they are interesting in there own right.

JD

Anonymous said...

"their"

Anonymous said...

Most trading blogs are bearish and pointing short since Oct. Where is that reflected in any solid data? Just gotta look around.

Anonymous said...

"Most trading blogs are bearish and pointing short since Oct. Where is that reflected in any solid data? Just gotta look around."

I will say this though; most trading blogs were bearish going into the 2008 meltdown as well. That's why it took so long if you ask me, the top tickers kept fueling the grind higher. It was ridiculously obvious that the housing bubble was bursting and yet the home builders kept making new highs.

I'm out til New Years, good luck to all...

JD