The S&P Futures have been on a tremendous run over the past several months with the market gaining over 60% since the low on March 23rd. Even though last week’s price action on S&P Futures continued to the upside, it’s interesting to note the volatility index (VIX) moved higher as well. We see similar trends when looking at the sentiment data – since 08/25, S&P Futures increased from 87% to 89% Bulls while VIX Futures rose from 11% to 21% Bulls. These observations beg the questions – is the market preparing for a pullback and, of so, how much of a correction should we expect?
To answer those questions, we applied the following filters to the historical sentiment data:
- S&P Sentiment = 80% Bulls or higher
- Three-Day Sentiment Change in VIX = 8% Bulls or higher
Since 2013, there have only been nine other times where we had a similar sentiment setup. Here are those dates along with trading stats assuming one shorted S&P Futures at the close of each signal:
| Sentiment Setup Date | Trading Days to Top | Max Loss to S&P Top | Max Gain on Pullback |
|---|---|---|---|
| 05/22/13 | 0 | -0.98% | 6.38% |
| 07/16/13 | 13 | -2.14% | 2.98% |
| 11/26/13 | 4 | -0.62% | 2.42% |
| 12/02/13 | 5 | -0.69% | 2.29% |
| 12/31/13 | 0 | 0.00% | 6.50% |
| 02/17/17 | 8 | -2.23% | 1.17% |
| 02/23/17 | 4 | -1.62% | 1.76% |
| 07/09/19 | 13 | -1.59% | 6.97% |
| 06/10/20 | 1 | -0.14% | 7.86% |
| Mean | 5.3 | -1.11% | 4.26% |
| Median | 4.0 | -0.98% | 2.98% |
Looking at those prior instances, you can see this sentiment setup consistently led to sideways to downward price action in S&P Futures. In some cases, this setup marked the exact top in S&P Futures and led to pullbacks of 6% or more. In other cases, S&P Futures traded higher for up to three weeks before correcting between 1-7%.
We believe the near-term risk for S&P Futures is to the downside. While we’re already short from 3460, we’ll be looking to add to the position on any strength from here – specifically around the 3525 and 3560 levels. On the downside, we’re looking for 3400 as a first profit target and will trail the rest of the position from there.
CONVICTION. EXECUTION. DISCIPLINE.
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