Posts Tagged ‘Inflection’
Monday, May 28th, 2012
by Guy Lerner, The Technical Take
Equity investor sentiment remains mixed. The Rydex market timers (i.e., dumb money) remain excessively bullish, and this is a bear signal. On the other hand, company insiders (i.e., smart money) are becoming more bullish, but the value is not yet extreme, which would be a bull signal. The “dumb money” indicator is neutral. I have been of the opinion that this is a market top. If prices were to move higher from this juncture, selling would likely ensue once the market became over bought. A better, more durable bottom leading to a sustainable price would more likely be seen if investor sentiment became more bearish. And what is the best way to bring out the bears? Why of course, lower prices and breaks of support levels and widely followed moving averages. With investor sentiment essentially mixed we are nowhere and without an edge. Lower prices would be great. Higher prices will only delay the inevitable.
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: “A market-wide Industry Buy Inflection was triggered on May 18th, the first since August 9, 2011. Buy Inflections are our strongest quantitative indicator of positive macro sentiment are triggered when buying reaches extreme levels. Presently, insider buying levels (as measured by the number of insiders buying, the number of companies with insider buying, the dollar value of purchases, etc.) is higher than normal, however, insider selling levels are normal. Typically we see insider selling levels fell to well below normal when there’s higher than normal insider buying levels. Buying is widespread, led by small- and mid-caps, though the big caps began showing a stronger buy signal as the week went on. “
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 69.07%. 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
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Tags: American Association Of Individual Investors, Company Insiders, Dollar Value, Dumb Money, Durable Bottom, Equity Investor, Extreme Levels, Figure 1, Guy Lerner, Inflection, Inflections, Investor Sentiment, Juncture, Market 1, Market Timers, Marketvane, Moving Averages, Put Call Ratio, S&P500, Smart Money
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Wednesday, September 14th, 2011
A good overview of the entire market and economic environment from hedge hogger Doug Kass. I find myself agreeing with the majority of his thought process here. Worth the full read, here are the over-arching views.
As an aside, there are some stunning data points on equity outflows from the market the past few months… and since 2007. If one believes prices are a the inflection of supply and demand, one has to wonder how the market put in such a rally the past few years during massive outflows ;) $400 BILLION has been removed by the retail investor yet the market essentially doubled. Somehow less money INTO the market has created HIGHER prices. Hmmm – wonder how. [Jan 6, 2010: Charles Biderman of TrimTabs Claims U.S. Government Supporting Stock Market] Anyhow that is not the focus of the piece – just an astounding rejection of economics 101.
I view share prices of many companies as having become generally more attractive over the last two months, but, at this point in time, there are four factors that keep me from being more heavily committed to equities:
- the stock market’s continued volatility and instability;
- the growing sovereign debt contagion in Europe (and failure of their leaders/central bankers to respond intelligently);
- continuing political partisanship (and failure of our leaders to properly confront our fiscal imbalances and to promote pro-growth policy); and
- an inability to gauge whether the erosion in the August sentiment measures (impacted by U.S. stock market and domestic/overseas economic uncertainties) will translate into weakness in hard domestic economic data.
In this setting, there are more numerous economic (and stock market) outcomes than are usual. As I have expressed recently. I see the following four potential outcomes:
Scenario No. 1 (probability 15%): The pace of U.S. economic recovery reaccelerates to above-consensus forecasts based on pro-growth fiscal policies geared toward generating job growth), still low inflation, subdued interest rates and the adoption of aggressive plans by the government to deplete the excess inventory of unsold homes. Corporate profits meet consensus for 2011, and 2012 earnings estimates are raised (modestly). Europe stabilizes, and China has a soft landing. Stocks have 25% to 30% upside over the next 12 months. S&P 500 target is 1500.
Scenario No. 2 (probability 15%): The U.S. enters a deep recession precipitated by a more pronounced negative feedback loop, a series of European bank failures and likely sovereign debt defaults in the eurozone. While 2011 corporate profits and margins disappoint somewhat (we are already well into full-year results), 2012 earnings estimates are materially slashed. China has a hard landing. Stocks have a 20% to 30% downside risk over the next 12 months. S&P target is 885.
Scenario No. 3 (probability 30%): The U.S. and Europe economies experience a shallow recession. Earnings for 2011 are slightly below expectations, but 2012 corporate profits are cut back to slightly below this year’s levels. Stocks have 10% to 15% downside risk over the next 12 months. S&P target is 1030.
Scenario No. 4 (probability 40%): The U.S. and European economies “muddle through” in a modest expansion mode (hat tip for the term to John Mauldin). Profits for 2011 meet consensus expectations, but slippage in margins brings down 2012 corporate profit growth projections somewhat. Stocks have 10% to 20% upside over the next 12 months. S&P target is 1355.
In June, nearly $21 billion was redeemed from domestic equity funds by retail investors. In July, almost $29 billion was withdrawn. In August, it has been estimated that more than $35 billion poured out. The $85 billion of outflows from June to August will likely approach the previous three-month record of $88 billion, which came out of domestic equity funds between September and November of 2008.
Thus far in 2011, individual investors have sold about $75 billion of domestic equity funds, only $10 billion less than last year’s total outflows. Astonishingly, since the beginning of 2007, domestic equity mutual funds have had net outflows of more than $400 billion — in the same period, $835 billion of fixed-income funds have been purchased. That spread between stock outflows and bond inflows ($1.235 trillion) is unprecedented in the annals of financial history.
In summary, investors should be prepared to expand net long exposures when:
- we gain better macroeconomic clarity (both domestically and overseas);
- the world’s stock markets begin to stabilize;
- we see evidence that the sovereign debt crisis in the Euro Zone has subsided (because of more proactive ECB policy); and
- our political leaders (hopefully) grow less divided and begin to promote and sanction pro-growth fiscal policies.
Tags: Consensus Forecasts, Contagion, Domestic Economic Data, Doug Kass, Economic Environment, Economic Recovery, Economic Uncertainties, Fiscal Imbalances, Inflection, Last Two Months, Market Outcomes, Massive Outflows, Outlook, Policie, Political Partisanship, Retail Investor, Share Prices, Sovereign Debt, Thought Process, Trimtabs, U S Stock Market
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