Friday, June 01, 2007
Wall of Worry: Are Traders Getting More Bearish As The Market Acts More Bullish?
Rennie Yang, who authors the excellent Market Tells service, notes an interesting pattern. Despite the recent market rise, investors in the AAII survey are 33% bulls and 45% bears. He notes bullish implications when we have a surplus of bears in this survey during a rising market period. That's the classic wall of worry that bull markets are said to climb.
Above we see a pattern that seems to confirm Rennie's observation. QID enables traders to place double-sized bets on a market decline in the NASDAQ 100 Index. As such, it is an excellent speculative vehicle for traders. Note in the chart above that, as QID has declined (i.e., the NASDAQ 100 has risen), the volume in QID has exploded.
In other words, traders are making more and larger bets against the NASDAQ as that market grinds higher. That's more than a wall of worry; more like a wall of pessimism!
Interestingly, since July, 2006 (N = 217; when my price data for QID begins) when QID is down on the day (rising NASDAQ) and QID volume is up for the day (N = 67), the next day in QID averages a loss of -.51% (41 down, 26 up). That is much weaker than the average loss of -.07% (87 down, 63 up) for the remainder of the sample.
It appears that, at least in the near term, a rising NASDAQ (falling QID) with rising bets on QID has been bullish, as the market confounds the pessimists.
NASDAQ Volume as a Sentiment Measure