Investor Sentiment: Don’t Worry Some Central Banker Has Your Back

Wednesday, July 4th, 2012

by Guy Lerner, The Technical Take

Last week, I complimented investors for understanding what is driving this market.  It is the perception that some central bank has back stopped asset prices.  And on the heels of another announcement by policy makers to bail out and backstop the banks and governments in Europe, the markets rallied strongly.  Like I said, investors know what to do once they understand what to do.  But beyond Friday’s euphoria (relief?), I am not so sure I can attach any long term significance to a plan that is long on hope and short on details.  Nothing has changed including investors’ perceptions as policy makers acted like they were suppose to.  And the markets reacted like they were suppose to.  Yet it is not clear to me why this latest proclamation is the “one” that will fix everything.   The big question does Friday’s action have any meaning for the markets beyond the short term.

From a sentiment perspective, the data remains consistent with a market top rather than the next launching pad to a new bull market or even a sustainable bull run.  For several weeks, I have been of the opinion that whatever bounce develops would not carry too far because sentiment really wasn’t too bearish at the bottom. Large rallies usually start with real extremes in investor sentiment and consensus among the sentiment data, which we did not see despite the SP500 dropping about 10% over 8 weeks from the April highs. Although the “dumb money” was bearish (i.e., bull signal), corporate insiders were neutral. Throw in the fact that investors have been primed to front run anything that sounds like quantitative easing or bail out, you can understand why investors weren’t too concern.  Don’t worry some central banker has your back.

From this perspective, little has changed to alter the “call”: this is a market top.  The price action and sentiment picture remain consistent with this observation.  Friday’s “pop” in the market could just as easily be due to calendar effects rather than another proclamation to fix an unfixable problem.  I don’t think there is any great significance to Europe’s latest plan to fix the world as we knew it!

The “Dumb Money” indicator (see figure 1) looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investors Intelligence; 2) MarketVane; 3) American Association of Individual Investors; and 4) the put call ratio. This indicator is neutral.

Figure 1. “Dumb Money”/ weekly

Figure 2 is a weekly chart of the SP500 with the InsiderScore “entire market” value in the lower panel. From the InsiderScore weekly report: “Insider trading volume began a seasonal decline last week with the number of unique buyers and sellers falling more than -40% sequentially. Companies generally close trading windows for insiders 10-14 days prior to quarter’s end and reopen them following their subsequent earnings announcement. Volume will continue to dissipate over the next few weeks and getting a macro read will be difficult because of the limited number of insiders who are free to trade.”

Figure 2. InsiderScore “Entire Market” value/ weekly

Figure 3 is a weekly chart of the SP500. The indicator in the lower panel measures all the assets in the Rydex bullish oriented equity funds divided by the sum of assets in the bullish oriented equity funds plus the assets in the bearish oriented equity funds. When the indicator is green, the value is low and there is fear in the market; this is where market bottoms are forged. When the indicator is red, there is complacency in the market. There are too many bulls and this is when market advances stall. Currently, the value of the indicator is 61.77%. Values less than 50% are associated with market bottoms. Values greater than 58% are associated with market tops. It should be noted that the market topped out in 2011 with this indicator between 70% and 71%.

Figure 3. Rydex Total Bull v. Total Bear/ weekly

Copyright © The Technical Take

Tags: Asset Prices, Backstop, Bounce, Consensus, Corporate Insiders, Dumb Money, Euphoria, Extremes, Governments, Guy Lerner, Investor Sentiment, Launching Pad, Nbsp, Obs, Perception, Perceptions, Quantitative Easing, Rallies, S&P500, Sentiment Data
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Sector Relative Strength – A Bullish Trend?

Friday, June 8th, 2012

Tags: Amp, Bounce, Bullish Trend, Dow Jones, Downside, Industrials, Investment Group, Materials Sector, Nbsp, No Doubt, Outlook, Outperformance, Price Of Oil, Relative Strength, Sectors, Shaded Red, Signs, Theorists, Twelve Months
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S&P 500 Quick Fibonacci Peek

Monday, June 4th, 2012

Just as a reminder the S&P 500 broke the 38.2% Fibonacci retrace of the Oct-March move Friday and now is is no man’s land between that level and the 50% retrace which comes in below 1250.  All major moving averages are also below their 200 day moving average of course.   Futures were down sharply Sunday evening but recovered this morning for whatever reason but this selloff is taking the S&P 500 back to where it was at the lows of the overnight session.

The “easy” trade today would have been a very bad open where shorts could cover and traders could flip long for a quick oversold bounce, but the market doesn’t like to make it easy.   The farther we go down from here the more ‘stretched’ we become in the very near term, and difficult for bears as well – it’s been nearly straight down since last Tuesday – almost 70 S&P points.  See chart for the Fibonacci levels I am referring to:

Tags: Amp, Bounce, Fibonacci Levels, Futures, Last Tuesday, Lows, Moving Average, Moving Averages, Overnight Session, Peek, Reminder, Selloff, Sunday Evening
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Chinese, European Data Continues to Weaken as Market Potentially Forming New Bear Flag

Thursday, May 24th, 2012

First we’ll go to the technicals.  Back in mid April I had opined a ‘bear flag’ formation was being created. [Apr 17, 2012: Potential Bear Flag Forming]  But the market being the difficult beast it is, head faked everyone and rather than a break down from said flag it first went UP and nearly touched yearly highs.  This caused everyone to think the bear flag had failed…. only to lead to a horrid May in the market.  Generally a bear flag will resolve relatively quickly but the longer that one lasted the more doubt it created and potentially transitioned into a market that was creating a new range before a new move up.  Hence, why it was so tricky.

I speak of this only because we potentially are forming a new bear flag.  After extreme oversold conditions the markets finally held a previous low Monday and rallied.  This had been expected for a few days but anyone trying to catch the knife last week had their fingers chopped off… repeatedly.   We had mentioned a potential bounce level to 1338 minimum [May 22, 2012: Market Bounce Arrives - How Durable?] but as of Tuesday mid day the rally only hit 1328 as it was rejected by the quickly falling 10 day moving average.  Then yesterday started horribly as news surfaced that discussions / preparations for a Greek exit from the EU are formally starting behind the scenes, and it really looked like the bears would take charge.  Instead it was a trap, as rumors out of Europe that (a) Merkel supports backstopping all EU bank deposits (b) Italy and France support Eurobonds [May 22, 2012: Are Eurobonds Coming?] and/or (c) pick your rumor, hit.

The larger picture is this environment is akin to summer 2010 and latter 2011 where headline rumors, European comments, intervention hopes dominate the landscape and the market is herked and jerked around while in a downward path.   The action is violent in sharp contrast to January and February of this year.   Stocks are moving en masse as correlations return, and individual stock picking is nearly useless again.  Meanwhile the safe havens – the U.S. dollar and Treasury bonds, surge.  Therefore, unless you know the rumor/intervention hope of the day ahead of time it’s really not a place anyone with intermediate term views is going to risk a lot of capital.

Speaking of the bear flag, yesterday’s sharp rally to take markets out of steep losses to very modest gains helps define a current potential bear flag range of about 50 points: S&P 1290 to 1340.  While we did not reach the 1338 in the S&P 500 I am still going to include that in the range as that is a multi month resistance/support level the market has been dealing with throughout the year.   So just as I said in mid April what happens WITHIN that range means nothing.  The market could be UP 25 S&P points or DOWN the same, but as long as it’s within that range it is only a basing activity and nothing but “white noise”.  And until further notice it is has the potential of a new bear flag forming.   Of course we sit almost smack dab in the middle of said range today.

If you turn this chart upside down you would call this very bullish…. we’d be saying after a large move up, the market is going sideways for a few days to digest the move.  Hence, it is only fair to lean bearish when we have the inverse situation.  The market can always differ and change things – technicals are only a roadmap and in a world of massive intervention they can quickly be obliterated as said roadmap.  So if we hear that to stop bank runs every single cent of bank deposit in the Eurozone will be backstopped by the ECB or “Germany” (with what money???) you will get a ‘face ripper’ type rally I am sure.  You can see that from yesterday where nothing but rumors got the Dow up 200 points from the low.  We repeat the same pattern year after year now, downfall, bad news, crisis, intervention, rally.  Rinse, wash, repeat.

As for economic news overnight – it continues bad.  China continues to weaken, but I think commodities have been telling us this for months.  Expect more easing in the future although they cut reserve requirements 50bps a week and a half ago.  And Europe data is also very weak, but this should come to no surprise to anyone.  I think some/much of this is ‘priced in’ the market but the mess that is the Eurozone remains the key issue.  Everyone awaits the authorities to swoop in and “fix it” (kick the can).  My thesis that QE3 is arriving has not changed since last fall, and is only being strengthened by the day.  In fact we might get coordinated global central bank action since the level of worries are global – we’ll see in a few weeks.

• The euro zone composite PMI, a combination of the services and manufacturing sectors and seen as a guide to growth, fell to 45.9 this month from April’s 46.7, its lowest reading since June 2009 and its ninth month below the 50-mark that divides growth from contraction.
• Markit, which complies the PMIs, or purchasing managers indexes, said the reading was consistent with gross domestic product, which stagnated in the first quarter, falling by at least 0.5 percent across the region in the current quarter.
• “The flash PMI figures for May look horrible and provide a clear warning that euro zone GDP will almost certainly show a contraction in Q2 after stagnating in Q1,” said Martin van Vliet at ING.
• Across the channel, official data showed Britain’s economy shrank more than first thought between January and March, after the deepest fall in construction output in three years, while government spending made the biggest contribution to growth.
• PMI data from Germany, Europe’s largest economy, showed its manufacturing sector contracted at a far greater pace than was expected, and its service sector saw minimal growth. In neighboring France, both sectors contracted faster than predicted by most economists.
• German business sentiment also dropped for the first time in seven months in May, the Ifo think tank said, missing even the most conservative forecasts, in a sign that Europe’s largest economy is vulnerable to euro zone turmoil despite holding up well until now.
• HSBC’s Flash China PMI, the earliest indicator of China’s industrial sector, retreated to 48.7 in May from a final reading of 49.3 in April. It marked the seventh straight month that the index has been below 50.  ”The series of highly disappointing April activity data – exports, imports, industrial production and retail sales indicators all fell short of even the most pessimistic forecasts – the first gauge for economic activity in the current month is a further signal that internal and external headwinds are still biting into economic momentum,” said Nikolaus Keis at UniCredit.

Tags: Bank Deposits, Bear Flag, Bears, Beast, Bounce, Doubt, Downward Path, Environment, Eurobonds, Europe, Few Days, Fingers, Italy And France, Landscape, Merkel, Mid Day, Moving Average, Rally, Sharp, Technicals
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Being Prudent is Boring … but Prudent

Wednesday, April 25th, 2012

Even in a downtrend since late March, the market is not making it easy for those awaiting this pullback.  Selling bouts are met with oversold bounces quite quickly, and the action is not consistent in one direction for that many days in a row.  The S&P is back above the key 1370 level this morning, after breaking the key 1370 level yesterday.  And since it’s key that is leading to a lot of choppiness.  But bigger picture we continue to see a market under distribution, and what appears to be a ‘head and shoulders’ formation being created on the senior indexes.  If you are unfamiliar with the term, please google it.

Yesterday I mentioned we had two key points of support – that was last week’s lows of 1365 and the previous week’s lows of 1357.  Both came into play yesterday as the market ultimately bounced just above the latter level and finished just above the former level.   If 1357 were to break, the next key level is 1340.  But for now, as noted – the buyers keep pushing the market back above 1370 on each dip.  However each rally is on light volume, while each selling bout is on heavy – hence all the distribution days.

I’d also point out that we are having a sector rotation under the surface even as the major indexes are down less than 5%.   Just about the entire momentum growth stock universe is taking turns getting hit.  And some of it is very random – take Ulta Salon (ULTA) today.  I cannot find any news, so unless something pops up later today I have to assume some big boys are liquidating as volume is huge.  But this is exactly the type of action that can rip away a lot of your money as you search for ‘relative strength’ – pile in, waiting for a bounce day like today, only to be punched in the face.

Today we popped a bit in the broader market on some housing data but in the big picture that data remains quite weak… I think it was more of an excuse to simply get an oversold bounce going.  Yesterday’s gap (137.87) has not yet been filled but we saw the gap down post Good Friday took about a week and a half to be filled and then some chop, and then back down.   So no one should be surprised to see a run to fill this gap later today or tomorrow morning (with Apple’s blessing).  At this point with a long series of distribution days in the market we need to see a true change of character to feel like these moves up are anything but head fakes and frustrating moments for the bears.

Obviously key events are Apple earnings tonight and FOMC Meeting and Bernanke quarterly update Thursday.  But Europe has not gone away, even though the market some days act like it after their markets close.  I don’t think the path is much different than it has been repeatedly the past few years – things will downgrade, people will sit on their hands until it gets really bad, then people will panic as the situation worsens, and then Germany or the central bank will step in to kick the can.  Markets will surge on the kick the can for however long that can stays in the air.  We’ll rinse, wash, and repeat  - until we do it again.  It’s Groundhog Day as their system is broken due to lack of autonomy for each country or the ability to print their way out of messes ala UK, Japan, USA.  See Iceland for an example – they defaulted on much of their debt, devalued their currency like mad and are back to growth.  You never hear about them anymore since they had the independence to do such things.

Tags: Amp, Big Boys, Big Picture, Bounce, Bounces, Bouts, Choppiness, Day Like Today, Excuse, Google, Growth Stock, Head And Shoulders, Indexes, Light Volume, Lows, Momentum, Pullback, Rally, Relative Strength, Sector Rotation
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Rosenberg: Déja 2011 All Over Again

Monday, April 16th, 2012

From the first day of 2012 we predicted, and have done so until we were blue in the face, that 2012 would be a carbon copy of 2011… and thus 2010. Unfortunately when setting the screenplay, the central planners of the world really don’t have that much imagination and recycling scripts is the best they can do. And while this forecast will not be glaringly obvious until the debt ceiling fiasco is repeated at almost the same time in 2012 as it was in 2011, we are happy that more and more people are starting to, as quite often happens, see things our way. We present David Rosenberg who summarizes why 2012 is Deja 2011 all over again.

From Gluskin Sheff

DÉJA VU

It is incredible how things are playing out so similarly to this time last year. We closed the books on 2010 at 1,257 on the S&P 500, then hit an interim high of 1,343 on February 18th of 2011 and then corrected to 1,256 on March 16th. We later had a nice bounce off that low to 1,363 on April 29th (a higher high). Who knew then that by October 3rd, the index would roll all the way back to 1,099 and was in dire need yet again for more central bank intervention?

This time around, the S&P 500 kicked off the year at 1,257 to hit an interim high of 1,374 on March 1st. We then corrected down to 1,343 as of March 6th and then rallied our way back to 1,419 on April 2nd (again, a higher high). Only time will tell if the 1,419 close on April 2nd proves to be the peak for the year as the 1,363 high as back on April 29th of last year.

In fact, the exact same pattern occurred in 2010. Out of the gates, the S&P 500 shot up from 1,115 to a brief peak of 1,150 by January 19th. After a brief correction (as we had in early March of this year) to 1,056 by February 8th, the market soared to 1,217 by April 23rd — literally, a straight line up —just as we saw happening two weeks ago. Again, who knew then that we would be at 1,047 by August 26th? Once again, it took aggressive action by the Fed to revive the bull. This is an incredible seasonal pattern. It works for bonds too. Has anyone recognized how the yield on the 10-year T-note surged in the winter-spring of 2008, 2009, 2010 and 2011? In each of the past three years, 4% was either pierced, tested or approached. These were the peaks of the year each time. This time, the seasonal high was 2.4%. Are you kidding me? Our pal Gary Shilling may well be onto something when he says the ultimate low may be somewhere close to 1.5%.

To some extent, the bounce we are seeing reflects how deeply oversold the market was with the Dow losing 550 points over a five-day span. The AAII sentiment poll showed the bull camp shrinking 10 points in the past week to 28.1% and the bear share expanding 13.8 points to 41.6% so quite the shift here. It does not take much at all in these nerve-racking times to get investors to switch their views on a dime. So much of the move has been technical. Sentiment perhaps in some cases washed out — very quickly. It is still too early in the earnings reporting season to make a call here on the fundamentals — Alcoa is not the canary in the coalmine for the overall economy. And the economic data are still broadly mixed. Much of this rally actually is based on quite a bit of fluff like renewed expectations that the Fed is actually going to embark on more stimulus after all, following comments yesterday from two senior Fed officials:

Based on such analysis, I consider a highly accommodative policy stance to be appropriate in present circumstances. But considerable uncertainty surrounds the outlook, and I remain prepared to adjust my policy views in response to incoming information. In particular, further easing actions could be warranted if the recovery proceeds at a slower-than-expected pace, while a significant acceleration in the pace of recovery could call for an earlier beginning to the process of policy firming than the FOMC currently anticipates.

Vice Chair Janet L. Yellen, The Economic Outlook and Monetary Policy

Remarks at the Money Marketeers of New York University

Also, we cannot lose sight of the fact that the economy still faces significant headwinds and that there are some meaningful downside risks. In the headwinds department, I would include the run-up in gasoline prices mentioned earlier because that will sap purchasing power, the continued Impediments to a strong recovery from ongoing weakness in the housing sector, and fiscal drag at the federal and state and local levels. In terms of downside risks, these include the risk that growth abroad disappoints and the risk of further disruptions to the supply of oil and higher oil prices.

On the inflation front, the overall rate of increase of consumer prices, as measured by the 12-month change of the price index for personal consumption expenditures slowed to 2.3 percent in February from a recent peak of 2.9 percent last September. Even though the recent rise of gasoline prices mentioned above could interrupt this pattern, we expect this moderation of overall inflation to resume later this year.

William C. Dudley, President of the New York Federal Reserve Bank

Remarks at the Center for Economic Development, Syracuse, New York

Beyond a brief jolt to investor risk appetite, it is debatable as to what these rounds of Fed balance sheet expansion really accomplished in terms of helping the economy out. Three years of near-0% policy rates and a tripling in the size of the Fed’s balance sheet hasn’t changed the fact that this goes down as the weakest recovery ever — we’ve never gone this long without seeing a quarter of 4% GDP growth or better — or that the economy remains extremely fragile.

One thing seems sure. If the stock market were truly telling us anything meaningful about the economic outlook, then we wouldn’t be having the yield on the 10-year T-note at 2.05% and barely budging as the S&P 500 nudged even higher to close at the highs of the session in yesterday’s impressive positive price action.

Tags: Aggressive Action, Amp, Blue In The Face, Bounce, Carbon Copy, Central Bank Intervention, Central Planners, David Rosenberg, Debt Ceiling, Deja, Deja Vu, Dire Need, Fiasco, Gates, Imagination, Recycling, Screenplay, Scripts, Sheff, Straight Line
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Squeeze continues, but don’t get carried away…..

Tuesday, September 27th, 2011

by The Trader, trader.se

Markets are moving very fast. Yesterday European morning we wrote of big squeeze set ups, in both metals and equities (mainly European equities). We have had a brutal squeeze to the upside since then (Squeeze Sign, Chartology). With everything having surged, even beyond our scenario, in a very fast move, we would be taking some chips off the table. Things haven’t changed fundamentally, but the extreme bearishness among inbvestors, had to create this move to the upside. We still believe the squeeze will continue, but at a “cooler” pace. With Roubini screaming Europe to go bust on a daily basis, and Barton Biggs dreaming of a ultrashort position at the bottom, we had the very much anticipated bounce. Now we need to wait for the pundits to become bullish and dreaming of being ultralong, before we start shorting the markets, once again.

SPX short term chart, soon to hit the first resistance levels.

Stoxx vs SPX 3 day chart below. For the brave, buy SPX vs short Stoxx set up coming up on a short term basis only though (not currency adjusted).

Silver has had a tremendous 24 hours….

Tags: Bounce, Bust, Chips, Daily Basis, Europe, European Equities, Extreme Bearishness, Metals, Pace, Pundits, Resistance Levels, Set Ups, Spx, Squeeze, Stoxx, Term Basis, Ups
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Natural Gas the Most Overbought? (Bespoke)

Friday, June 3rd, 2011

by Bespoke Investment Group

Don’t look now but the natural gas fund (UNG) is currently the farthest above its 50-day moving average out of more than 200 key ETFs (and ETNs, etc.) that we track daily in our ETF Trends report over at Bespoke Premium.  You know the financial markets are struggling when natural gas is the most overbought asset class, considering that the commodity has been a perpetual decliner for years now.

Give credit where credit is due, though.  As shown below, UNG has made a significant bounce over the past week or so, and today it traded to a new four month high.

Copyright © Bespoke Investment Group

Tags: asset class, Bounce, Commodity, Copyright, ETFs, Financial Markets, Investment Group, Natural Gas
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Technical Talk: S&P 500 hovering above key support

Wednesday, June 30th, 2010

The comments below were provided by Kevin Lane of Fusion IQ.

Stocks closed last week on a modest positive note as the S&P 500 finished with its first positive close after four straight losing sessions. The S&P 500 Index is now hovering not far above key near-term support in the 1,041 area (see chart below). In the short run the index may see an oversold bounce after the four days of selling. However, the inability of the previous rally to materialize into anything substantial and then to so quickly retreat certainly make us skeptical of the bulls.

That said, the trading range on the S&P 500 is fairly wide and only a violation of support near 1,041 would turn the bigger picture more negative. Market internals were modestly positive on Friday and in line with the marginal advance. However, new lows continue to creep up on a consis­tent basis and bear watching. Market volatility also popped back into the picture last week as traders played hot potato with stocks. This is in stark contrast to earlier in the year when traders were more likely to buy and be patient.

As seen in the chart above the S&P 500 is range bound between the 1,041 (upper orange line) and 1,142 (lower red line) levels. Momentum as highlighted by the 14-week RSI is in a weak­ened state as well. Given the S&P 500 has now tested this 1,041 level on three separate occasions �’ February 2010, May 2010 and June 2010 �’ any additional test would increase the likelihood of a break.

Only a move back above the 100-day moving average (1,133 level and not seen in the chart above) above which the S&P 500 recently tried to rally, and failed, would turn the short-term trend positive.

Source: Kevin Lane, Fusion IQ, June 28, 2010.

Tags: Bounce, Bulls, Hot Potato, Iq, Likelihood, Lows, Market Volatility, Momentum, Moving Average, Occasions, Orange Line, Rally, Red Line, Rsi, Sessions, Stark Contrast, Stocks, Tent, Term Trend
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Bouncing Back After May?

Friday, June 11th, 2010

This article is a guest contribution by Frank Holmes, Chief Investment Strategist, US Global Investors.

May was a brutal month for stocks. The 7.9 percent decline in the Dow ranks as the sixth worst in history but a report from JP Morgan shows that could bode well for the summer.

The table shows the 10 worst May declines in Dow history followed by subsequent June and July performance. Combined, the average decline for the 10 worst Mays was 12 percent, then a 13.6 percent average bounce back (4.2 percent in June, 9.4 percent in July) over the next two months.

The Dow has traded up during June-July 8 out of 9 times (89 percent) when following one of the worst Mays in terms of performance. The only year to not see a June-July bounce back was 1962 when the market dropped an additional 11 percent.

On average, the Dow has traded positive 59 percent of the time in June-July dating back to 1897.

We haven’t seen anything resembling a bounce back yet but market hangovers from a bad May have tended to linger eight days into the following month. The worst was in 1932 when the market didn’t recover well into July.

While historical data certainly doesn’t ensure how June-July 2010 will shake out, statistics like these can help our portfolio team take advantage of market cycles.

Copyright (c) US Global Investors

Tags: Average Decline, Bounce, Chief Investment Strategist, Dating, Declines, Dow History, Eight Days, Frank Holmes, Hangovers, Jp Morgan, Market Cycles, Mays, Statistics, Stocks, Us Global Investors
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