If you are a closed-minded, statistically rigorous, intellectual who cares about sounding smart at cocktail parties, stop reading this post right now!

If you are open-minded and worship at the Church of What Works, and furthermore believe that indicators are generally predictive before they become mainstream (and statistically meaningful), feel free to continue reading this post.

I've previously noted that the new ONN "risk on" and OFF "risk off" Fisher-Gartman Risk ETFs have lost money overall (despite the fact that they should move opposite to each other). Since inception on 11/30/11, ONN has returned 1.83% while OFF has returned -2.97%, which suggests that the "right" trade was to be net short both risk-off *and* risk-on. That is, it's been profitable to be a contrarian to the contrarians — which is another way of saying "my enemy's enemy is my friend."

Nonetheless, I think there could be utility to these two ETF's as a new (and totally objective) retail market sentiment indicator. If one plots the open interest (shares outstanding) of ONN versus the open interest (shares outstanding) of OFF, one can see a daily quantitative measure of retail risk-on/risk-off sentiment. Unlike the AAII surveys (and most sentiment measures), this involves real money — and so isn't prone to myriad polling biases.

Obviously the data history is extremely short, the ETF size is small, the baskets are constructed in suspect ways, the liquidity is limited, and it has the eponymous moniker of the "world renowned" Dennis Gartman. Yet if those issues really concern you, you didn't follow my instructions to stop reading this post at the end of the first sentence!

A number of specs have written to me that market participants already use the leveraged S&P long and short funds as sentiment indicator in a similar ways. I'd note that the S&P is only one part of the (world-renowned) Gartman risk-on/risk-off basket. W.R. Gartman also includes bonds, crude, copper, gold, silver, corn, etc.; so its behavior and information content may be quite different from the S&P etfs.


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