Earnings for the first quarter are strong, so why did traders throw their winning stock picks away when fear indicators said stand fast? Volatility was at extreme levels mid-week and institutional sentiment was more bullish than bearish.
Fear gripped the average trader/investor, so many sold the prevailing sentiment. Was this a smart move? In retrospect, we would suggest developing indicators that reliably measure these extremes in fear, so that a trader can be better positioned when fear dissipates.
VIX VXV is without question, one of the better indicators to watch at extremes. Volatility extremes can be harnessed by the astute trader/investor. Measuring these peaks in fear can offer tremendous opportunity to those who know what to look for. Each time this indicator hits the 1.0 level, its time to look for a short term collapse in this extreme volatility. In other words, we should look for bullish setups in stocks that are ready to bounce or breakout from solid support levels. To learn more about how we consistently select winning stock picks, consider joining our trading room today.
Sentiment – What are institutions doing?
Against the backdrop of volatility and fear, we also need to measure institutional sentiment. Understanding and confirming what hedge fund managers and institutional money is doing will render a clear picture of the current market environment. TICK cumulative does exactly that. It measures the cumulative effect of institutions buying more stocks on the “uptick” when this indicator rises versus selling more stocks on the “downtick” when it drops.
SPY price action is in the upper panel, while TICK cumulative is in the lower panel. With TICK cumulative rising, one would correctly surmise that more stocks are being bought by institutions on the “uptick”. And, with earnings growing, it makes no sense to throw your stocks away when the indicators herein tell you to wait it out.
“Earnings Growth: For Q1 2017, the blended earnings growth rate for the S&P 500 is 13.6%. If 13.6% is the actual growth rate for the quarter, it will mark the highest (year-over-year) earnings growth for the index since Q3 2011 (16.7%).” – FACTSET
By constantly assessing fear and sentiment, we can become better traders in the process. Both of the charts referenced in todays post are available to subscribers in Vinny’s Chart Library on the main site. I constantly update all of the charts therein with notes and tradable information when appropriate.
For more information on how we consistently bring members winning stock picks every week and how you can become a proficient trader/investor consider joining our trading room today. May 15 watch list performance for the month is referenced below.