I will post a series of thoughts... this one is quite significant, about sentiment. sentiment can be measured by many things... this is one of my favorite... notice the sp is back to about mid october '18 level now, but what happened to the retail positions - significant increase in shorts. For those who are not familiar with this indicator... in almost all of 2017 it was about 9:1 short:long, which explains why we had a smooth rise... the ratio shifted to about 7:3 in early 2018 when we had a big shake.. then in early october '18 it was about 1:1 short:long... big shift in retail sentiment... the market was ripe for a shake down. of course for long term holds you never know when the big guys would start shaking. after all 1:1 ratio wasn't that crazy right.. but the important thing is that after the october to december shake down, now the plate has been cleansed... retails are now back on the short side, thinking 'this stuff is way too high', and long side speculators are shaken out... now we are back to close to the old high, and ready to push higher, without carrying along the speculators. the big boys play this game like the pros they are... and amateurs have no chance... these shorts will be slaughtered in the coming days/weeks, while new dumb money will come in to short more on the way up. the key here is you need to think like the big boys... their intentions can be read if you train yourself to read it.. the evidence is everywhere because they have all the tools... they have the firepower to move the market in any direction (but it must be the logical direction!), and they have the media machine to pound your psychie from all the channels... if you cannot beat them you have to join them...
This data is not representative of retail as a whole. This does not represent positions on the S&P 500. The "US 500" chart and data that you are showing is from one of IG's CFD products. There are no pro-traders within that sample because no hedge funds are taking speculative or hedging positions in a CFD. Even if "pro-traders" were in the mix, I don't think IG crosses orders, they are a dealing desk right? So the "pros" would never be directly competing with the "amateurs" at least from a counterparty perspective. To top it off, the sample size is very limited at around 2400 traders. Either that or this market is really small with 2400 traders total. In that case it is not a sample but instead showing the entire population for that product. The majority of retail equities holders are long only/buy & hold. Either directly as a holder of an S&P 500 tracking etf or via a long only mutual funds that track the S&P. I'm not saying that this data is worthless. Maybe it could offer some value by fading the crowd? The main problem you would face trying to trade this information in an automated fashion would be sideways periods of sentiment flip flopping. Take a look on your chart at October to mid November, you would be flipping positions from long to short and short to long multiple times during that period. All of that chop would eat you up and really put a dent in the gains you would realize from late December to now. My guess is, the returns of this signal would be similar to that of trading based on a 200 day moving average. Better look elsewhere for alpha.
From my anecdotal perspective I tend to agree that a lot of retail speculative money is on the side lines. My sample size is small but most people I speak to who have nothing to do with trading are sitting on the sidelines waiting for a correction in equities. On the other hand there has been a huge push for index investing buy and hold strategies in the last decade so there must be lots of retirement accounts all in on equities.
interesting but if the market does go up..as it usually does if people are sitting out...then these become buyers at higher level... if it does fall as expected then these become buyers at lower level. so when there are sitters ....sitting out, the bull will continue
good point - the question is then why do people keep wasting time trying... and, is there any chance for success at all.
I find it interesting how you kept a similar thread back in the summer right before the big sell off came... hmm