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%.

ES Futures

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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