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Monday, December 15, 2014

1 Traders have been selling high-yield junk bond funds heavily, including the most popular exchange-traded funds. That has pushed the market price on these funds to more than 1% below the value of their underlying securities, a rarity for ETFs. See page 2.

2 Since the inception of S&P 500 futures, they have lost more than -1% during the

week of December option expiration only 1 time out of 32 years. The average return is +1.1%, with an average drawdown (i.e. maximum loss) of -0.7% versus an average maximum gain of +2.1%, a 3-to-1 reward-to-risk ratio. If Monday of expiration week closed lower (like it did on Monday), then the rest of the week was positive 8 out of 9 times, averaging +1.9%.

60%

67%

500

700

900

1100

1300

1500

1700

1900

20%

30%

40%

50%

60%

70%

80%

12/17/13 3/17/14 6/17/14 9/17/14

Smart Money Dumb Money S&P 500

The data and analysis contained herein are provided “as is” and without warranty of any kind. Sundial Capital Research, Inc., its employees, or any third-party data provider, shall not have any liability for any loss sustained by anyone who has relied on the information contained in any publication published by Sundial Capital Research, Inc. No report shall be considered a solicitation to buy or sell any stock or security. This communication reflects our opinions as of the date of this communication and will not necessarily be updated as views or information change. Sundial Capital Research, Inc. and its respective employees may have lpositions in the securities discussed herein and may purchase or sell such securities without notice. The information contained herein is believed to be accurate to the best of our knowledge, and we make no guarantees that there will not be errors from ourselves or third-party data providers. We make every effort to validate data integrity, but occassionally errors do occur and we subsequently make an effort to disclose that to subscribers. Further distribution prohibited without prior permission.

Copyright 2014 (c) Sundial Capital Research, Inc. All rights reserved.

What We're Watching

Stocks Short-TermShort-term risk has declined again as signs of pessimism increase and stocks head into a consistently positive time of year

Stocks Intermediate-TermRisk has declined back to neutral after rising to above-average levels on December 4, with the huge increase in uncertainty being the main factor

BondsThe Optimism Index for bonds has pushed into extreme territory for the first time since mid-2012, suggesting a rise in yields is becoming more likely

GoldOptimism is in extreme pessimism territory, but has a bit to go before matching extremes from the past year

See the Active Studies page for other markets

Published by Sundial Capital Research

Daily Sentiment Report

Sundial Capital Research, Inc.12527 Central Avenue NE

Suite 165Blaine, MN 55449

Jason GoepfertPresident

[email protected]

RE-DISTRIBUTION NOT ALLOWED

WITHOUT PRIOR CONSENT of 14

@ Copyright 2014 Sundial Capital Research, Inc.

No content contained in this report is intended as

a solicitation to buy or sell securities in any form.

Studies And Updates

31-May-2013

19-Aug-2013

12-Dec-2014

Median

All Days

# Up

# Down

Relevance

Relevance above 95% suggests statistical significance; the higher the %, the more robust the result

@ Sundial Capital Research, Inc. sentimenTrader.com

Nearing Panic In High Yield Bonds

Late last week, we took a look at the "triple time frame" rate of change in high-yield (junk) bonds, which was showing one of the most severe bouts of selling pressure in 30 years.

When we see sharp dislocations like this, it makes the job of arbitrageurs more difficult. Some love it because it creates opportunities for large gains; others loathe it because it makes their daily cash flow unpredictable.

One of the favorite targets of arbitrageurs is closed-end funds. Driven by retail investors, the market price of closed-end funds often drifts from the value of the underlying assets held by the fund. An arbitrageur can buy the fund at its market price, then hold it and wait for the market to catch up.

There is still risk involved because the underlying assets could deteriorate, but buying the assets at a discount provides the investor with a tailwind and a greater chance of a positive return than if they had bought the assets at fair market value.

With exchange-traded funds, arbitrageurs don't have as much opportunity because of how the funds are priced and

traded. We rarely see popular ETFs trade with a large premium or discount to the fund's Net Asset Value.

That's what makes the current situation unusual for the three most popular ETFs that track the high-yield bond market.

HYG, JNK and PHB are the three go-to funds for investors who want quick and convenient access to high-yield bonds. The vast majority of the time, the three funds all have a market price that's within 1% of the underlying value of the funds' holdings.

Not now.

Investors have started to panic, and the funds' prices are now more than a percentage point below their NAV. We only have 7 years' worth of history, but every other time the discount dove to -1% is shown in the table on the next page.

It didn't say much about the shorter-term prospects of the funds, but longer-term it was a good sign of irrational selling pressure. From 3 months forward, the only negative instance occurred during the financial crisis of 2008.

iShares iBoxx $ High Yield Corporate Bond ETF (HYG)

Source: CBOE, Bloomberg Finance LP @ Sundial Capital Research, Inc. sentimenTrader.com

Premium / Discount To NAV For HYG, JNK And PHB

Discount > -1%

+1% Premium

-1% Discount






Studies And Updates - continued

Signals 1 Day 1 Week 2 Weeks 1 Month 3 Months 6 Months 1 Year

(2007-2014) Later Later Later Later Later Later Later

15-Sep-2008 -2.3% 0.2% -10.6% -12.4% -24.3% -20.1% 6.9%

23-Feb-2009 1.4% -4.6% -9.7% 1.5% 15.1% 26.5% 38.6%

7-Jul-2009 0.6% 1.9% 6.5% 11.4% 14.7% 23.4% 25.4%

4-Feb-2010 -0.6% -1.8% 1.5% 3.6% 1.1% 8.1% 16.4%

5-May-2010 -2.5% 0.4% -1.7% -2.8% 4.3% 8.8% 15.3%

16-Jun-2011 1.1% 2.3% 3.9% 4.0% 0.8% 2.5% 9.3%

4-Aug-2011 -0.1% -1.3% -1.0% 0.7% 3.1% 8.2% 13.3%

23-Nov-2011 0.0% 5.1% 5.7% 8.8% 13.0% 10.4% 19.8%

17-May-2012 0.0% 0.9% -0.7% 2.6% 6.3% 7.4% 16.7%

31-May-2013 -0.1% -0.1% 0.4% -1.2% -0.1% 3.5% 8.2%

19-Aug-2013 0.9% 1.5% 1.0% 3.7% 5.2% 7.5% 11.1%

12-Dec-2014

Median 0.0% 0.4% 0.4% 2.6% 4.3% 8.1% 15.3%

All Days 0.0% 0.1% 0.3% 0.6% 2.0% 4.1% 10.0%

# Up 4 7 6 8 9 10 11

# Down 6 4 5 3 2 1 0

Relevance 11% 30% 5% 71% 53% 73% 95%

Relevance above 95% suggests statistical significance; the higher the %, the more robust the result

@ Sundial Capital Research, Inc. sentimenTrader.com

HYG Performance After Multi-Fund Discount > -1%






Date Description Priority Bias S&P 500 should be…

18-Nov-2014 S&P breaks out of tight range to new high Low Bullish > 2040 from Feb - Dec 2015

17-Nov-2014 Extremely negative SPY Liquidity Premium Low Bearish < 2041 into Dec 2014

14-Nov-2014 Highest 5-day range to lowest w/in 30 days Medium Bullish > 2040 from Dec 2015 - Mar 2015

31-Oct-2014 S&P component new highs spike higher Medium Bullish > 2018 through Dec 2015

30-Oct-2014 S8P thrusts above its 5-day average Medium Bullish > 1994 from Nov 2014 - Oct 2015

2-Oct-2014 InsiderScore buy inflection Medium Bullish > 1946 from Nov 2014 - Oct 2015

8-Jul-2014 Consecutive 5% jumps in VXO Low Bullish > 1963 through Jul 2015

9-May-2014 Tight range near a 52-week high Medium Bullish > 1878 through May 2015

16-Apr-2014 Issuances of money-losing IPOs continues High Bearish < 1862 through Apr 2015

19-Feb-2014 10-day breadth thrust High Bullish > 1828 through Feb 2015

Date Description Priority Bias Market implication

8-Dec-2014 Bond optimism becomes extreme Medium Bearish 10-year yield > 2.25 through early 2015

5-Dec-2014 Mexican stocks (EWW), peso extreme pessimism Medium Bullish EWW > 61.50 through spring 2015

13-Nov-2014 Metals & Mining public bearish & insiders bullish High Bullish XME > 34.63 through early 2015

3-Nov-2014 Materials fund (XLB) shows extreme pessimism Medium Bullish XLB > 48.06 through early 2015

Active Studies

Stocks

Other Markets

The Active Studies highlight studies we've discussed in prior reports that are still "active". This means that the market isstill within the time frame that was indicated as being effective, meaning it showed returns or consistency that was significantly different than random during the study period. For some studies, there was not a concrete time frame given, but rather general market conditions. The study would remain "active" as long as those market conditions were in effect.






Stocks Short-Term Sentiment Summary

3

S&P 500 - Past 90 Days

Short-term Optimism Index (Optix)

S&P 500 Down Pressure (3-day average)

% Of S&P 500 Stocks > 10-Day Avg

Equity Put/Call Ratio

Inverse ETF Volume As % Of Total

Bottom Line: Odd readings continue in this market. The VIX "fear gauge" declined more than -3% despite more than a -0.5% loss in the S&P 500, the first time this has happened on any day other than a Friday (traders often reprice options on Friday to account for time decay during weekends). When it has happened (again, only on Fridays), the S&P 500 rose over the next three days 21 out of 28 times. One of the most seasonally positive times of the year begins now, though that is always only a tertiary consideration. More importantly, there are numerous signs of excessive pessimism on a shorter-term time frame, with the Optix at 25 and confirmed by a variety of other measures, so risk has declined again.

Low risk(0)

High risk(10)

Risk Level






Stocks Intermediate-Term Sentiment Summary

5

S&P 500 - Past Year

Intermediate-term Optimism Index (Optix)

Stock / Bond Ratio

% Of S&P 500 Stocks > 50-Day Avg

De-Trended Equity Put/Call Ratio

SPY Liquidity Premium

Bottom Line (Updated 12/12/14): The last update from December 4 raised the risk level to slightly above-average due to a number of overly-optimistic readings. Now that stocks have sold off, and more importantly we've seen a spike in uncertainty, that risk has decreased back to normal levels. The way things are going, it may not take much more to trigger below-average risk on a 1-3 month time frame. As always we will monitor that on a day-by-day basis.

Low risk(0)

High risk(10)

Risk Level






Typical Sentiment Cycle

MaximumOptimism

(early Jan 2014)

Last Gasp 1

Re-Test

Lower Low(3%-8% decline)

MaximumPessimism

Re-Test 2

Explosive Rally 3

Belief-Building Phase

Belief-Building Phase

WE ARE HEREHighest Probability

The Typical Sentiment Cycle is a real bull-to-bear phase from the S&P 500 in 1966. It displayed the classic price phases that many cycles exhibit. The WE ARE HERE box is a partially subjective judgment based on sentiment conditions, price behavior and fundamental ratios. It should proceed forward the majority of the time, but may skip backward as new information becomes known. These are rough approximations only.

The case against using something like this is that every cycle is different. No two markets ever look exactly the same, or exactly like this. Sometimes, like the mid-1990s, the middle phase just keeps going and going and going. More typically, stocks spend 1-3 months in each phase, though there is wide variation in that, from weeks to years.

Note that "maximum optimism" and "maximum pessimism" normally occur before a market peak and market trough, respectively. It's rare for bull phases to end when optimism is at its highest point. The same goes for bear phases, but that is less consistent - sometimes a bear will end in panic and both price and sentiment will bottom at the same time.

BULL PHASE BEAR PHASE BULL PHASE

1 What to watch for: Divergences with breadth figures; "This time is different" articles; arrogance from bullish commentators; proliferation of new types of funds; closing of long-time funds that are not fully invested.

2 What to watch for: Divergences with breadth figures, doomsday prophesies on mainstream media, stocking up of staples among consumers, heavy trading activity, ridicule of "knife catching" buyers.

3 Watch to watch for: Explosive price gains over 2-3 day periods; massive thrusts in market breadth; "Just another bear market rally" articles; minimal pullbacks after short-term overbought readings

CORRECTION

Fear-Building Phase(More than 8% decline)

CORRECTION

WE ARE HERELower Probability

WE ARE HERELowest Probability






Stock Sentiment Breakdown

Indicator Groups

Optix Optix

Volatility Volatility

Options Options

Pressure Breadth

Oscillator Surveys

TICK C.O.T.

Shorts

Cash

Insiders

Rydex

December 15, 2014

Intermediate-Term Short-Term

19%

25%

0%

10%

20%

30%

40%

50%

06/19/14 07/19/14 08/19/14 09/19/14 10/19/14 11/19/14

% Of Indicators At An Extreme

--- S&P 500 --- % Showing Excess Optimism--- % Showing Excess Pessimism

@ Copyright sentimenTrader.com

48

40

50

45

85

50

55

80

45

95

25

40

45

35

40

40

ExcessOptimism

ExcessPessimism

ExcessOptimism

ExcessPessimism






Stock Sentiment Breakdown

Breakdown Of Indicators At Extremes

Indicators Showing Indicators Showing

Excess Pessimism Chart » Excess Optimism Chart »

Equity PutCall AAII Bull Ratio

IPOs Consensus Bulls

ISE Sentiment Index Dumb Money Confidence

Mutual Fund Flow (No ETFs) Equity / Money Market Ratio

New High / New Low - NYSE Mutual Fund Cash %

Odd Lot Shorts NAAIM Managers

OEX PutCall Net Available Cash - NYSE

Risk Appetite Index OEX PutCall Open Interest

Rydex Beta Chase Index Retail Money Market

Rydex Bull/Bear Spread Rydex Bearish Flow

Secondary Offerings Rydex Money Market %

Short-Term Optix Rydex Ratio

TICK - NYSE SKEW IndexUp Issues - NYSEUp Volume - NYSEVIXVIX Term Structure

December 15, 2014






Sector Optimism Indexes

20

25

30

35

40

45

50

55

0

10

20

30

40

50

60

70

80

90

100

Nov-13 Feb-14 May-14 Aug-14 Nov-14

Basic Materials

XLB Optix XLB

48

0

50

100

150

200

250

300

350

0

10

20

30

40

50

60

70

80

90

100


Biotechnology

IBB Optix IBB

70

15

25

35

45

55

65

75

0

10

20

30

40

50

60

70

80

90

100


Consumer Discretionary

XLY Optix XLY

72

20

25

30

35

40

45

50

55

0

10

20

30

40

50

60

70

80

90

100


Consumer Staples

XLP Optix XLP

54

25

35

45

55

65

75

85

95

105

0

10

20

30

40

50

60

70

80

90

100


Energy

XLE Optix XLE

47

0

5

10

15

20

25

30

0

10

20

30

40

50

60

70

80

90

100


Financials

XLF Optix XLF

66






Sector Optimism Indexes

15

25

35

45

55

65

75

0

10

20

30

40

50

60

70

80

90

100


Health Care

XLV Optix XLV

62

20

22

24

26

28

30

32

34

36

0

10

20

30

40

50

60

70

80

90

100


Housing

XHB Optix XHB

64

20

25

30

35

40

45

0

10

20

30

40

50

60

70

80

90

100


Technology

XLK Optix XLK

71

22

27

32

37

42

47

52

0

10

20

30

40

50

60

70

80

90

100


Utilities

XLU Optix XLU

44 The Sector Optimism Indexes are based on sentiment in the respective ETFs. This includes option market activity, volatility expectations, premium/discount to NAV, fund flows and price activity. The Indexes can go from 0 (most pessimistic) to 100 (most optimistic).

For most of them, sentiment above 70 can be considered extreme optimism, after which the sector tends to struggle. Sentiment below 30 tends to indicate exreme pessimism, after which the sector usually rallies. The box will turn red if the score is above 70, and green if below 30.

Click here for a sortable table of the most active ETFs, including these, and links to interactive charts.

0

10

20

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50

60

70

0

10

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70

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90

100


Industrials

XLI Optix XLI

42






Optimism Index Ranks

Interactive List »

Interactive List »

Interactive List »

13

21

30

35

35

38

38

38

41

41

43

50

51

52

55

Russia

Mexico

UK

Canada

Japan

Australia

Brazil

India

Spain

Emerging Markets

Italy

Germany

China

United States

France

Countries Ranked ByLowest - Highest Optimism Index

23

33

41

42

42

44

47

48

53

54

54

55

55

61

62

64

66

68

70

71

72

Junior Gold Miners

Gold Miners

Oil Services

Industrials

Metals & Mining

Utilities

Energy

Basic Materials

Retail

Oil & Gas

Consumer Products

Semiconductors

REITs

Real Estate

Health Care

Homebuilders

Financials

Volatility

Biotechnology

Technology

Consumer Discretionary

Sectors Ranked ByLowest - Highest Optimism Index

25

27

28

32

36

38

39

41

43

44

54

55

55

56

56

58

58

58

58

61

Holding Companies-Divers

Storage/Warehousing

Trucking&Leasing

Machinery-Constr&Mining

Home Builders

Coal

Iron/Steel

Metal Fabricate/Hardware

Entertainment

Machinery-Diversified

REITS

Lodging

Cosmetics/Personal Care

Office Furnishings

Semiconductors

Real Estate

Airlines

Advertising

Biotechnology

Textiles

Industries Ranked ByLowest - Highest Optimism Index

7

10

10

10

12

12

13

13

14

14

81

81

82

82

83

84

84

85

86

94

Valmont Inds

Cullen/Frost

Sturm Ruger & Co

Windstream Holdi

Dun & Bradstreet

Transocean Ltd

Now Inc

Rayonier Adv

Joy Global Inc

Liquidity Servic

Prudentl Finl

Prologis Inc

Mohawk Inds

On Assignment

Boston Propertie

United Tech Corp

Delta Air Li

Facebook Inc-A

Viad Corp

Pericom Semicond

Stocks Ranked ByLowest - Highest Optimism Index






Currency, Commodity And Bond Sentiment

Currency Futures Grain Futures

British Pound Corn

Canadian Dollar Soybeans

Euro Wheat

Swiss Franc

U.S. Dollar Soft Futures

Japanese Yen Cocoa

Coffee

Cotton

Energy Futures Lumber

Crude Oil Orange Juice

Heating Oil Sugar

Natural Gas

Unleaded Gas

Meat Futures

Cattle

Metal Futures Hogs

Copper

Gold

Silver Bond Futures

Platinum Eurodollar

2 Year

5 Year

10 Year

30 Year

Bond ETFs

TLT

BND

HYG

JNK

LQD

Interactive List »

26

25

21

23

80

17

24

11

31

21

25

29

42

30

38

27

55

47

43

20

44

50

24

60

34

25

25

50

38

50

72

56

37

29

45

ExcessOptimism

ExcessPessimism

ExcessOptimism

ExcessPessimism






Short-Term Risk Level Intermediate-Term Risk Level

Risk Avg % Avg Max Avg Max Risk Avg % Avg Max Avg Max

Level Return Positive Loss Gain Level Return Positive Loss Gain

0 - - - - 0 1.6% 64% -6.0% 8.6%

1 7.3% 100% -0.2% 8.3% 1 3.8% 62% -3.5% 6.6%

2 2.3% 73% -1.4% 2.5% 2 5.3% 77% -3.5% 7.4%

3 0.1% 52% -1.4% 1.5% 3 5.4% 70% -5.3% 8.2%

4 1.0% 70% -1.0% 2.0% 4 2.7% 63% -3.6% 4.8%

5 0.3% 56% -1.1% 1.1% 5 2.6% 65% -4.7% 5.8%

6 0.4% 59% -0.8% 1.1% 6 1.5% 56% -5.6% 4.8%

7 0.4% 66% -0.7% 1.1% 7 1.1% 58% -5.2% 5.0%

8 0.3% 57% -1.4% 1.7% 8 0.8% 54% -3.8% 4.0%

9 - - - - 9 -6.9% 25% -11.9% 3.5%

10 - - - - 10 -4.0% 39% -12.3% 2.8%

Disclosures

S&P 500 Returns Past 3 Years

The Risk Level travels on a scale of 0 (extremely

low risk) to 10 (extremely high risk). Based on our

study of indicators and technical movements, it

represents the risk to traders of a correction over

the next week.

S&P 500 Returns Past 10 Years

The Risk Level travels on a scale of 0 (extremely low

risk) to 10 (extremely high risk). Based on our study

of indicators and technical movements, it represents

the risk to traders of a correction over the next 3

months.

The data and analysis contained herein are provided “as is” and without warranty of any kind. Sundial Capital Research, Inc., its employees, or any third-party data provider, shall not have any liability for any loss sustained by anyone who has relied on the information contained in any publication published by Sundial Capital Research, Inc. No report shall be considered a solicitation to buy or sell any stock or security. This communication reflects our opinions as of the date of this communication and will not necessarily be updated as views or information change. Sundial Capital Research, Inc. and its respective employees may have lpositions in the securities discussed herein and may purchase or sell such securities without notice. The information contained herein is believed to be accurate to the best of our knowledge, and we make no guarantees that there will not be errors from ourselves or third-party data providers. We make every effort to validate data integrity, but occassionally errors do occur and we subsequently make an effort to disclose that to subscribers. Further distribution prohibited without prior permission.

The Correction Risk Level is a quick way to gauge what our indicators and studies are suggesting. The higher the risk, the more likely the market is to decline. Another way to look at it is in terms of cash. If the Correction Risk Level is 0, then we would be more inclined to keep 0% of our portfolio in cash (i.e. we would be fully invested). But if the Correction Risk Level is 10, then we would be more inclined to keep 100% of our portfolio in cash (i.e. no exposure to stocks).

In both cases, we take the overriding trend of the market into account. If the indicators are showing excessive amounts of bearish opinion, then the market is more likely to respond favorably to that if we're in a bull market, and the Correction Risk Level would be lower. But if we're in a bear market, then bearish sentiment extremes are less reliable, and the Correction Risk Level would be a bit higher.We take our studies into account as well. So if the indicators are murky, but we have some very compelling studies suggesting the market should rally, then the Correction Risk Level might be lower than the indicators would suggest.

The default Correction Risk Level is 5, which is where it would be if there is no edge present among our indicators and studies.

We do not suggest using these Correction Risk Levels in any kind of mechanical way. They are meant to help support any existingtechnical or fundamental research you may be doing. When the Correction Risk Level is very high, though, we do recommend backing off on long positions or possibly considering short positions (especially during a bear market). For both time frames, aCorrection Risk Level below 3 can be considered "low risk" while a level above 7 can be considered "high risk". The more extreme the Correction Risk Level, the more likely the market will respond in a timely manner.

The most likely time for these Correction Risk Levels to fail is during a time of trend transition from a bull to bear market (or bear to bull). That is often good information in itself - if the Correction Risk Level is very high, for example, but prices continue to rise, then that is a heads-up that buyers are very interested, and we will likely see even higher prices going forward.






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