The Weekly Market Sentiment Report: 21st April - 28th April 2024

The Weekly Market Sentiment Report: 21/04/2024 - 28/04/2024

CONTENTS

• EVOLUTION & NATURE OF THE REPORT

• ECONOMIC CALENDAR

  • THE COT REPORT STRATEGY

  • PUT-CALL RATIO SENTIMENT INDEX

  • EQUITY SENTIMENT INDEX

  • EQUITY YEARLY MILESTONE INDEX

  • EURUSD SENTIMENT INDEX

  • THE ISM PURCHASING MANAGER’S INDEX (ISM PMI)

• THE COT REPORT STRATEGY TRACK RECORD

• CORRELATION HEATMAP

• CLOSED OPPORTUNITIES

• DISCLAIMER

EVOLUTION & NATURE OF THE REPORT

This report will grow in time due to feedback and new techniques put into place. New sentiment models are constantly added while taking into account their overall utility. Feel free to leave a feedback (e.g. nature of the document, its usefulness, its time interval, its content, language, etc.).

The directional views are represented using the following convention and are followed by their charts:

⚡ This symbol represents a new directional opportunity.

🔁 This symbol represents an on-going directional opportunity.

✅ This symbol represents a recently closed opportunity at a profit.

❌ This symbol represents a recently closed opportunity at a loss.

The directional views presented must simply be used to help confirm the overall expected direction of the analyzed market. The support and resistance zones are not hard levels, they are merely areas of expected reactions (reversals), and hence for risk management purposes, you are advised to place your stops as you see fit. Naturally, when the market clearly breaks the reversal zone, the view is invalidated, however some noise may occur around it before we see a clear reaction.

ECONOMIC CALENDAR

An economic calendar is a tool used in finance and economics to track and display upcoming economic events, announcements, and indicators that are relevant to the financial markets and the broader economy. The following shows what to expect for the coming week:

THE COT REPORT STRATEGY

The CFTC publishes statistics of the futures market on a weekly basis called the Commitment of traders (COT) report. The report has many valuable information inside, namely the number of futures contracts held by market participants (hedge funds, banks, producers of commodities, speculators, etc.).

💡 Relevant Information 💡

Two main categories in the COT report must be distinguished:

• Commercial players: They deal in the futures markets for hedging purposes (i.e. to cover their operations or other trading positions). Examples of hedgers include investment banks and agricultural giants. Their positions are negatively correlated with the underlying market.

• Non-commercial players: They deal in the futures markets for speculative reasons (i.e. to profit from their positions). Examples of speculators include hedge funds. Their positions are positively correlated with the underlying market.

The COT report strategy is the core of this report. It highlights the markets that are overbought or oversold with regards to sentiment.

The following table summarizes the current state of the sentiment for currencies and indices:

Make sure to remember that theses are not advices whatsoever, they are merely charts that fuse sentiment analysis with technical analysis:

⚡SPX/NIKKEI: Bearish reaction expected around 0.1362/0.1377 to 0.1296.

⚡ZARMXN: Bullish reaction expected around 0.8860/0.8800 to 0.9136.

✅ SPX: Potential approached/seen.

✅ BTCETH: Potential approached/seen.

✅ ETHEUR: Potential approached/seen.

✅ AUDMXN: Potential approached/seen.

💡 Relevant Information 💡

The views are found by combining different markets together. For example, if the EUR has an extremely bearish sentiment and the CAD has an overly bullish sentiment, then a bullish position on EURCAD can be interesting if the technicals justify it.

The following table summarizes the current state of the sentiment for commodities:

Make sure to remember that theses are not advices whatsoever, they are merely charts that fuse sentiment analysis with technical analysis:

⚡ COFFEE/SUGAR: Bearish reaction expected around 12.63/13.075 to 11.03.

🔁 HOGS: Bearish reaction expected around 28.18/28.87 to 25.00.

🔁 PLATINUM/GOLD: Bullish reaction expected around 0.40/0.39 to 0.43.

⚠️ Relevant Information ⚠️

The track record of the COT report strategy can be found at the end of the newsletter.

You can also check out my other newsletter The Weekly Market Analysis Report that sends tactical directional views every weekend to highlight the important trading opportunities using technical analysis that stem from modern indicators. The newsletter is Free.

PUT-CALL RATIO SENTIMENT

The equity put-call ratio (PCR), published by the CBOE gives insights to the current market anxiety. It is the number of puts divided by the number of calls. Historically, the correlation with the stock market (S&P 500) has been intuitively negative at ~ -0.40 using the Spearman rank correlation and ~ -0.32 using the Pearson correlation coefficient.

💡 Relevant Information 💡

Correlation is a statistical measure that tells us if there's a relationship between two variables and how strong that relationship is.

Pearson correlation is used when both variables are continuous and follow a linear relationship, meaning when one variable goes up, the other tends to go up or down predictably. Spearman correlation, on the other hand, is used when the relationship is not necessarily linear.

Additionally, the maximal information coefficient (MIC) which measures the degree of non-linear relationship is ~ 0.20, which suggests there is a relationship between the two time series (whether negative or positive). The following chart shows the current and past signals.

🔎 Interpretation 🔎

The scanner is showing a bullish signal after last week’s drop, which was accurately predicted by the COT report strategy. Will the SPX stabilize and bounce next week?

EQUITY SENTIMENT INDEX

This index simply calculates the percentage of stocks in the S&P 500 that are above their 50-Day moving average. A rule of thumb of this index is to use it as follows:

• A bullish signal is generated whenever the index surpasses 20%, thus indicating that more stocks are surpassing their moving average.

• A bearish signal is generated whenever the index breaks 80%, thus indicating that more stocks are breaking their moving average.

The following shows the evolution of the index versus the S&P 500.

🔎 Interpretation 🔎

After breaking the 80% threshold and giving a bearish signal these past days, the index seems to be approaching neutrality. The correction predicted by the index was adequate even though the signal came a little early. To get a bullish signal we need to break 20% and then re-integrate it.

EQUITY YEARLY MILESTONE INDEX

This index simply calculates the percentage of stocks in the S&P 500 that are above their close from one year ago. A rule of thumb of this index is to use it as follows:

• A bullish signal is generated whenever the index is close to 0% or is surpassing 50%.

• A bearish signal is generated whenever the index is close to 100% or is breaking 50%.

The following shows the evolution of the index versus the S&P 500.

🔎 Interpretation 🔎

Less and less stocks are above their close prices from one year ago. Currently, no strong signal has been given by the index. It seems that it has an interesting reactionary zone around 50%. Will reaching that level give a bullish signal? Let’s see, for now we seem to still be reacting from the resistance at 75%.

EURUSD SENTIMENT INDEX

This index simply calculates the percentage of the USD major crosses that are above their 20-Day moving average. A rule of thumb of this index is to use it as follows:

• A bullish signal is generated whenever the index surpasses 15%, thus indicating that more USD pairs are surpassing their moving average.

• A bearish signal is generated whenever the index breaks 85%, thus indicating that more USD pairs are breaking their moving average.

The following shows the evolution of the index versus EURUSD.

🔎 Interpretation 🔎

The index has broken again the 15% level indicating that the EURUSD pair is not ready for the bounce yet as it didn’t move much this week. Surpassing 15% again gives a bullish trigger. Currently, no interesting view is given by the index.

THE ISM PMI

The institute for supply management provides a monthly survey called the purchasing manager’s index abbreviated to ISM PMI, which is based on questions asked to 400 representatives of industrial companies about the current and future trend of their different activities. It is composed of 5 components that can also be analyzed individually:

• New orders — 30% weight.

• Production — 25% weight.

• Employment — 20% weight.

• Supplier Deliveries — 15% weight.

• Inventories — 10% weight.

💡 Relevant Information 💡

Typically, we interpret the index as 50 being the neutral state of the economy (neither growing and neither shrinking). A reading above 50 indicates an expansion in manufacturing and a reading below 50 indicates shrinking in manufacturing.

The following shows the strategy applied on the index.

🔎 Interpretation 🔎

With around 80% of hit ratio, the strategy’s signals are to be taken seriously. Currently, no signal to mention.

If you want to see more of my work, you can visit my website for the books’ catalogue by simply following this link:

THE COT REPORT STRATEGY TRACK RECORD

You will find in this section the details of the previous COT signals from the COT report strategy. Note that this track record is only for illustrative purposes, it is not supposed to attract or sollicit any type of action. It is a bookkeeping way of making sure that the techniques used are still delivering value:

All these views can be verified by accessing the previous newsletter in the homepage. The hit ratio is calculated using the directional method. This means that the moment the analysis published, an entry is assumed. If the target has been approached or attained, then the view is recorded as a good forecast. Otherwise, if the market clearly breaks the reaction area (support or resistance), it is recorded as a bad forecast.

Do not hesitate to share your thoughts and forecasts in the comment section.

CORRELATION HEATMAP

Correlation is a statistical measure that quantifies the relationship between variables. It measures how closely the returns of two or more assets move together. It ranges from -1 to 1. Understanding the correlations between different markets and asset classes is crucial for managing risk and expectations. The following shows the heatmap between different key markets.

A correlation close to -1.00 implies a negative relationship between the two markets (they move in opposite directions), while a correlation close to 1.00 implies a positive relationship between the two markets (they move in the same direction). Finally, a correlation close to zero implies that there is no linear relationship between the two markets (they may or may not move in the same direction).

CLOSED OPPORTUNITIES

This section highlights the previous charts given from the COT report strategy.

DISCLAIMER

Every information contained in the report is solely for the purpose of showing another angle. Since it is NOT investment advice or trade recommendations, you must NOT use the report as the sole reason for your trading and investing activities.

Trading is fun, enriching, and interesting but not when it comes at the expense of your hard-earned funds. Do not risk what you cannot afford to lose. You must only trade with money you have already considered gone and you must not use trading as your sole revenue generator. Risk management is even more important than the trading strategy itself, make sure to master it.

Data can have many representations and the information presented is but one side of the story which may be incomplete. All back-testing and forward testing results reflect their own time period and not the future as is the case in every research piece.