As the old saying goes, there’s “nothing like a change in price to change sentiment.” And oh what a change in price we’ve had. The Nasdaq 100 (QQQ) is up 14% in 8 sessions, and the SPDR S&P 500 (SPY) is up 10.5% during the same time period.
Individual names are up even more; Apple (AAPL) is up 9 straight days for a 16% gain, Tesla (TSLA) is in the midst of an 8-day run of 32%. More telling of how overinflated their valuations were are some bubble stock bounces. In the past 10 days, Affirm (AFRM) is up 75% and Upstart (UPST) is up 67%. However, they’re still down 75% from their 2021 highs. Heck, even meme names such as Gamestop (GME) and AMC Entertainment (AMC) have come back into play.
Options360 has been using this rally to close out some bullish positions in Lithium (LAC) and Plug Power (PLUG) for 85% and 56% gains, respectively. On Wednesday, Options360 initiated a new bearish position in Best Buy (BBY) which is already showing a nice 21% gain on the p/l. Again, the importance of maintaining an open mind, flexibility, and the ability to shift positions cannot be overstated. On Tuesday, I mentioned Options360 had initiated a bullish position in Morgan Stanley (MS). I didn’t like the price action as financials weren’t reacting favorably to the rise in interest rates, which is usually a positive for banks; so I closed the position for a 13% loss the very next day. As they say, your first loss is usually your best loss.
One image that shows how price can shift sentiment and vice versa is the QQQ vs. the iShares Treasury (TLT) which is a proxy for the 10-Year Note. For most of 2021, and the first couple of months, there was a tight correlation between the two, as rates rose, the QQQ declined. The reasoning was that for high-growth companies, many of which might not yet be turning a profit, cheap money is a crucial ingredient to driving growth and making the shares look relatively cheap on a discounted cash flow basis (DFS).
The correlation broke badly in mid-March; the QQQ’s retested the February 24th low then took off like a moon shot. During this near-vertical move higher in the QQQs, yields have jumped over 60 basis points; 35% to a new two-year high of 2.45%. Head scratching stuff.
Some other signs of how the price switch has changed investor sentiment include:
- The equity put/call ratio has been under 0 .5 for five consecutive days, suggesting a put protection removal and a dash in upside call buying.
- The VIX has dropped by some 40% over the past 10 days to its lowest in six weeks or prior to the invasion of Ukraine.
Sentiment polls, such as AAII Sentiment Poll, saw the largest jump in bulls in 4-plus months and a commensurate decline in bears.
The market shifted from oversold to overbought in a matter of days and FOMO seems to be coming back into play. Options360 used the shift to book some gains in a couple of bullish positions and initiate a new bearish one. Basically, I think the bullish side of the boat was getting too crowded. I’m not quite ready to lean over the bearish bow but am happy to sit in the stable middle waiting for the next wave.