Thu, February 9, 2023 | 5:10PM ET

Short-term sentiment diverging from intermediate-term sentiment

Mark L. Newton, CMT ^AC

Head of Technical Strategy

Key Takeaways

SPX is testing 4088, giving a warning that a minor pullback could be getting underway

Sentiment has lifted to bullish in the short run, while still negative overall

Treasury sentiment has reached the most bearish in years, which argues for lower yields

Short-term sentiment diverging from intermediate-term sentiment

The near-term pattern is wavering a bit, and SPX has pulled back to test 4088, which was thought initially important on any minor pullback. This is “Do-or-Die” support in the short run. Breaking 4088 would be a short-term negative, which could allow for a bit deeper near-term technical pullback before rallies can get back underway.

Given February’s tendency to be a more difficult seasonal time than January, I suspect that the ongoing uptrend from December 2022 might very well require some consolidation before we can immediately rally up to 4250.

To the market’s credit, sector-wise, the underperformance in some of the Defensive sectors looks to be a positive for US Equities, along with Technology’s relative outperformance.

Overall, any break of 4088 won’t have immediate support until 4032 at a minimum and might reach 3980. However, it’s expected this should be the extent of any weakness, and should provide a buying opportunity for a push back over SPX-4200.

Bottom line, violations of 4088 and failing to recoup this right away would be a warning for possible short-term weakness. However, the broader trends are positive, along with weekly momentum and bearish intermediate-term sentiment. Thus, pullbacks should prove minor and temporary, before support takes hold and takes prices higher.

Break of minor triangle is more bearish than bullish until recouped

A close-up view of price action over the last couple weeks shows that S&P formed a minor triangle that brought prices right down to make-or-break territory right into the Noon hour Thursday, just after Europe’s close.

A close-up view of price action over the last couple weeks shows that SPY 2.35% formed a minor triangle that brought prices right down to make-or-break territory right into the Noon hour Thursday, just after Europe’s close.

This was an important Do-or-Die for SPX for Thursday, but instead of rallying back higher to take out 4180, prices broke below the bottom area of trendline support.

This is a minor negative in the short run, and needs to be recouped ASAP before rallies to 4250 and higher can get underway.

Performance on this pullback doesn’t look too worrisome

Interestingly enough, Thursday’s selloff doesn’t really have the makings of a strong shift towards defensive groups, nor Technology weakness that would be worrisome.

Normally ahead of or during the start of a decline, groups like Utilities, REITS, and Staples will show broad outperformance, while some of the former market leaders wane.

However, Thursday’s performance is far different from this positioning. While all major sectors but one is negative, the single positive sector is Consumer Discretionary, being powered higher by Casinos and Autos.

1-day performance data below of the GICS Level 1 sectors shows that Consumer Discretionary is outperforming all other sectors, but most importantly is outperforming Staples. Meanwhile, Technology is outperforming Utilities. Overall, this doesn’t seem that scary, and should provide a chance to buy into this pullback soon.

Sentiment seems to show Short-term ebullient opinions while intermediate-term sentiment remains clearly negative

Short-term, the following seem to be concerns from a bullish perspective, suggesting that sentiment has gotten more optimistic:

The REDDIT Wall Street Betz crowd shows elevated sentiment, per Fundstrat’s Adam Gould’s model
AAII just switched to bullish for the first time in months, albeit not a huge spread. (More Bulls than Bears) ( This typically is more relevant at extremes, but notable that this is the first time in months where AAII shows more Bulls than Bears)
Zero days to expiration Options (0-DTE) are dominating trading right now. Last week’s Call option totals showed the highest call option trading ever.
Investors Intelligence data is bullish along with CNN Fear and Greed Poll shows “Extreme Greed.”

However, on an Intermediate-term basis, the sentiment remains clearly still quite bearish

CFTC CME non-commercial E-Mini S&P positioning still short -200k Contracts
Global Portfolio Manager (PM) risk appetite is at 2-decade lows (Bank of America Portfolio Mgt Survey)
Percentage allocation to US Equities among global PM’s is the lowest since 2005 (BofA Portfolio management survey)
Investor Cash balances are quite high and have climbed in recent months
Overall, while it might be right that near-term sentiment polls have escalated a bit coinciding with the best start for the NASDAQ in over 30 years, it’s thought that Equity selloffs should prove temporary and prove to be buying opportunities.

CFTC Treasury positioning now shows the most bearish sentiment since 2018

Also quite interesting in recent weeks is the extent that bearish sentiment has gotten elevated with regards to the Treasury market. When viewed in price terms, this rapid escalation of negativity translates into everyone believing that yields have to go higher.

My own cycle composites show that minor blips higher in Yields should be a chance to overweight fixed income, as I believe yields fall steadily into March and/or April before yields bottom.

Overall, the net-net takeaway to this chart below is that rates likely should continue to drop over the next month, not rise.

Furthermore, given the ongoing levels of negative correlation between Treasury yields and stocks which has reached the most negative in nearly 20 years, this seems to be a positive “arrow in the quiver” for Market bulls (Equities should rally as yields go lower).

The chart below is the Commodity Futures Trading Commission (CFTC) net Non-commercial Treasuries exposure (Non-commercial equates to large Traders/hedge funds).

(One translates this largely from a contrarian perspective- The shorter hedge funds are, the most likely they’re wrong as a group at extremes)

Disclosures (show)

This research is for the clients of FS Insight only. FSI Subscription entitles the subscriber to 1 user, research cannot be shared or redistributed. For additional information, please contact your sales representative or FS Insight at fsinsight.com.

Analyst Certification (Reg AC)

Mark L. Newton, CMT, the research analyst denoted by an “AC” on the cover of this report, hereby certifies that all of the views expressed in this report accurately reflect his personal views, which have not been influenced by considerations of the firm’s business or client relationships. Neither I, nor a member of my household is an officer, director, or advisory board member of the issuer(s) or has another significant affiliation with the issuer(s) that is/are the subject of this research report. There is a possibility that we will from time to time have long or short positions in, and buy or sell, the securities or derivatives, if any, referred to in this research.

Conflicts of Interest

This research contains the views, opinions and recommendations of FS Insight. At the time of publication of this report, FS Insight does not know of, or have reason to know of any material conflicts of interest.

General Disclosures

FS Insight is an independent research company and is not a registered investment advisor and is not acting as a broker dealer under any federal or state securities laws.

FS Insight is a member of IRC Securities’ Research Prime Services Platform. IRC Securities is a FINRA registered broker-dealer that is focused on supporting the independent research industry. Certain personnel of FS Insight (i.e. Research Analysts) are registered representatives of IRC Securities, a FINRA member firm registered as a broker-dealer with the Securities and Exchange Commission and certain state securities regulators. As registered representatives and independent contractors of IRC Securities, such personnel may receive commissions paid to or shared with IRC Securities for transactions placed by FS Insight clients directly with IRC Securities or with securities firms that may share commissions with IRC Securities in accordance with applicable SEC and FINRA requirements. IRC Securities does not distribute the research of FS Insight, which is available to select institutional clients that have engaged FS Insight.

As registered representatives of IRC Securities our analysts must follow IRC Securities’ Written Supervisory Procedures. Notable compliance policies include (1) prohibition of insider trading or the facilitation thereof, (2) maintaining client confidentiality, (3) archival of electronic communications, and (4) appropriate use of electronic communications, amongst other compliance related policies.

FS Insight does not have the same conflicts that traditional sell-side research organizations have because FS Insight (1) does not conduct any investment banking activities, and (2) does not manage any investment funds.

This communication is issued by FS Insight and/or affiliates of FS Insight. This is not a personal recommendation, nor an offer to buy or sell nor a solicitation to buy or sell any securities, investment products or other financial instruments or services. This material is distributed for general informational and educational purposes only and is not intended to constitute legal, tax, accounting or investment advice.
The statements in this document shall not be considered as an objective or independent explanation of the matters. Please note that this document (a) has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and (b) is not subject to any prohibition on dealing ahead of the dissemination or publication of investment research.
Intended for recipient only and not for further distribution without the consent of FS Insight.

This research is for the clients of FS Insight only. Additional information is available upon request. Information has been obtained from sources believed to be reliable, but FS Insight does not warrant its completeness or accuracy except with respect to any disclosures relative to FS Insight and the analyst’s involvement (if any) with any of the subject companies of the research. All pricing is as of the market close for the securities discussed, unless otherwise stated. Opinions and estimates constitute our judgment as of the date of this material and are subject to change without notice. Past performance is not indicative of future results. This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The opinions and recommendations herein do not take into account individual client circumstances, risk tolerance, objectives, or needs and are not intended as recommendations of particular securities, financial instruments or strategies. The recipient of this report must make its own independent decision regarding any securities or financial instruments mentioned herein. Except in circumstances where FS Insight expressly agrees otherwise in writing, FS Insight is not acting as a municipal advisor and the opinions or views contained herein are not intended to be, and do not constitute, advice, including within the meaning of Section 15B of the Securities Exchange Act of 1934. All research reports are disseminated and available to all clients simultaneously through electronic publication to our internal client website, fsinsight.com. Not all research content is redistributed to our clients or made available to third-party aggregators or the media. Please contact your sales representative if you would like to receive any of our research publications.