Joined Dec 4, 2012
319 Blog Posts

I Hate This Move

In my opinion, this is as big a suckers rally that I have ever seen. My points are as follows:

Last Friday began the up move and it was not validated by the advance/decline line. On January 29th the S&P 500 rose 2.48% and the advance/decline line was 4,151, Then on January 22nd the S&P 500 rose 2.03% and the advance/decline was 4,258. Last Friday is was 3,261 which is not representative of a 2% move.

Second, at last Thursday’s low, we again had the chance to test the October 2014 low on SPY of $180.92 and fell to $181.09. I wrote back in January that the January 20th low of $181.02 wasted the opportunity to test the October 2014 low. Mark my words the computers know this level and are waiting patiently for it to be taken out and then test how far we can drop from there.

Third, this up move from Friday through today saw my oversold indicator go from 30 to 68. Such a move in three days is too much too soon. In fact, my oversold indicator has not been able to move above 70 since late October. That is bad. There is bad oversold and bad overbought as well as good oversold and good overbought. Currently, we are on the brink of another bad overbought indicator since last July.

Fourth, options failed to get extreme on last Thursday’s low but then did back on January 20th. I use a proprietary rank from Phil Erlanger that looks at open interest, premiums, money flow and volume over the last ten trading days using median averages. It kills it time and again at meaningful lows. Thursday was not a meaningful low with extreme options sentiment on the put side.

Last, short interest IS NOT heavy. Quite the opposite. It is barely average. At the September low, it was off the charts. Ditto in February of 2009 and almost every meaningful I have seen since 1993.  I really fear the shorts got blown out the last three days and now there is no one short and short interest drops back to below average.

Then once the buying dries up, and it will, then stocks move into long squeezes, i.e. no one is short and the technicals suck. The poster child for this Starbucks which has a short ratio of 1.44 with an Erlanger Short Intensity of 27%. Another break of $55 and this name could go to $40 on a break of $50.

The inability of people to understand the true dynamics of short interest data is rather telling and I will prey on those that make such claims as short interest is really high now.

Look I want to be bullish. Business is much easier when we are in a bull market and the “legally blind” are making money. Instead we have been in environment where the “legally blind” have been getting their clocks cleaned since mid 2015.

P.S. I am not bearish right now either as the Model Short Portfolio I run for Erlanger Research is 25% short and 75% cash. I felt that as of last week, the downside had run its course and shorts would be more difficult money makers. Year to date that portfolio is up 3.99%.

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  1. boyaj

    Nice post, and super informative. A couple quick follow ups. First, what is the Erlanger option research called? Is it the Erlanger Short Intensity? Second, where do you get your short interest information from? Again, thanks for all the help.

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