Morning Market Comment - November 2, 2009

Good morning...We begin the day with a slight rebound from Friday's sharp reversal of Thursday's sharp reversal. This week's economic biggie will by the Jobs Report on Friday, and these reports will probably start to take on more significance as earnings season starts to wind down. Fewer than 100 components of the S&P 500 report this week, and that drops under 20 next week as it semi-officially ends with Wal-Mart on the 12th.

Something catching a little buzz this weekend was the latest Big Money Poll published semi-annually by Barron's. It's always an interesting read and it always generates the question of whether these folks are really the smart money or not.

Earlier this spring, we took an in-depth look at that, and couldn't see much of a ringing endorsement for following the consensus picks of these esteemed money managers. While individually they are quite accomplished, in the aggregate there is evidence of group-think that leads to less-than-stellar results more often than not.

The title of the most recent poll result is Treading Carefully, but it's hard to see why. The Bull Ratio of the group (82%) is nearly as high as it has ever been, and over the next six month the bulls are predicting a 13% rise in the S&P 500, the third-highest predicted gain in the past 10 years.

Their last prediction was off by 15%. The one before that missed by 35%. The one before that erred by 38%. So, you know, maybe that 13% gain isn't exactly set in stone.

In April, we concentrated mostly on the macro outlook for stocks, and showed the accuracy of the predictions. This time, let's narrow it down to the specific sectors and asset classes that are favored (and not) by these folks.

First, let's look at these money managers' picks for the market's likely leading sectors. The chart below is ordered from most- to least-favored in the current poll.

The impact of the bear market is clear - these guys and gals are not all that keen on sticking out their neck for any one particular sector. Technology earned most-favored status, but just by a smidge.

If you look at the chart above, the current level of 19% (meaning that 19% of the money managers feel that tech will lead the market going forward) is well below the peaks it enjoyed in prior years, when nearly 70% or more of the managers like Tech. Of course, those peaks were in 1999 and early 2007 just before it got whacked, so you can't blame a little bit of sheepishness now.

Let's switch to the other side of the coin and look at what sectors these guys don't like. The chart is ordered from most-hated to least-hated.

Financials take the cake for being the most-despised sector, overtaking Consumer Cyclicals.

These money managers absolutely hated Financials in early 2007 (nice job) but became less and less disdainful heading into 2008 (uhh, not-so-nice job). And Tech is notable as only 1% of these managers feel that that sector will lag going forward, which I suppose is more of an endorsement than 19% of them feeling it will lead.

Now let's switch from the stock market to general asset classes. The chart below shows the assets that the managers are bullish on, ordered from most- to least-bullish.

Treasury Bonds aren't exactly a safe haven according to these folks, which is a pretty common theme among the "smart money" crowd. Stocks are the most-favored class, but that's always been the case as is evident from the first chart. These are mostly long-only equity managers, after all, so that's not a big surprise. They're always going to talk their book to some degree.

Oil has made a strong comeback, with just under 50% of them liking it. Apparently they would fit in well with large speculators, who jumped to a near-record net long position in the latest Commitments of Traders report. That's probably not a good sign.

Now the flip-side, where we rank the assets these guys don't like. Again, the chart is ordered from most-hated to least-hated.

Wow, these guys REALLY don't like Treasuries. The only time they disliked government bonds more than now was from the spring of 2003 through the spring of 2004. Bonds actually did pretty well after that, so I'd count that as a miss on their part.

They didn't like Real Estate or the US Dollar at the end of 2006 (nice calls), tempered their distrust a bit over the past couple of years, but again aren't especially fond of the greenback. The Dollar is now in second place again among the least-favored, while Real Estate is third.

Somewhat surprisingly, the are the least bearish on Oil, with even fewer bears than stocks. That's pretty unusual for any asset class other than Cash.

Overall, then, it's apparent that these managers of billions continue to love stocks (no shocker there), but are showing an unusually tepid view of the underlying sectors. There isn't any one place that sticks out as especially loved or hated.

Among asset classes, however, Treasury Bonds and the Dollar are despised, while Stocks and Oil are seen as the best places to park some cash. These managers have a better track record at macro calls on asset classes than they do stocks, which is kind of ironic since they are mostly equity fund managers.

Given their mixed record as a consensus, I'd read that article more for individual ideas than for big macro calls.

Signal Strength Breakdown	Notes
Sentiment:	Smart/Dumb Confidence Spread is neutral
Trend: to	The S&P still has a rising 200-day average and a series of higher highs/higher lows, but the uptrend line from March has been broken
Support / Resistance:	With the long uptrend and recent correction, there are layers of support and resistance nearby
Other Tendencies:	Pullbacks after highs have been positive, but we're seeing more and more "toppy" kind of behavior

Beginning in early March, we discussed a large number of reasons to expect an imminent rally of one to three months' duration, or possibly even a new bull market. During April and May, we went over several studies that suggested that "this time is different" in terms of bear market rallies, as we reiterated in early May.

Since July, the market has consistently rallied smartly from the shortest-term oversold readings, as a healthy market does, and it has rolled over almost all hints of bearish conditions. That kind of momentum tends to persist for long periods of time.

We've seen some periodic bouts of excessive optimism along the way, and the market has pulled back in the very short-term after them. But each time, the major indexes have held technical support, and rallied from even intraday oversold readings, so we've seen little change in the uptrend's character.

Over the past week or so, we've gone over a few modestly convincing studies that show some cracks in the uptrend's potential. We're seeing some very volatile swings in breadth, a deterioration in the number of stocks rising along with the market, a number of big reversals after tests of recent highs, and a hesitation to rally from short-term oversold readings.

All of these were warning signs, and now the S&P 500 has violated its uptrend from the March low. It is still showing a series of higher highs and higher lows, and will until it drops below 1020, but the intermediate-term trend has lost one leg of its bullish stance.

Signal Strength Breakdown	Notes
Sentiment:	Our shorter-term indicators are oversold
Trend:	A clear series of lower highs and lower lows
Support / Resistance:	Most likely support from here is 1015-1020, but now resistance around 1070
Other Tendencies:	The market has rallied well since March after multiple down days and oversold conditions; positive seasonality

The VIX index was up 24% on Friday. In the past when it has jumped more than 23% in a day, the next day was positive most of the time. But it's also notable that it was the largest one-day gain for the VIX in more than a year, and in the past when we've seen that kind of move, it had mixed results at best going forward. I don't think there's a lot to read into with that.

Friday's trading certainly wasn't encouraging, as the S&P moved back below the 1040 level that had been support, and was a line in the sand for some oversold readings such as the McClellan Oscillator we discussed last week. Now that the index has violated that level, it brings to the fore some of the more bearish scenarios we studied.

In the meantime, we once again have an abundance of short-term indicators that cycled back into oversold territory, most notably the STEM.MR Model, Price Oscillator and Cumulative TICK. In another bad sign for the longer-term health of the market, recent reactions from oversold readings on those gauges have been tepid, but still, trying to press short positions against them isn't often a good idea.

With those oversold readings and consistently positive seasonality for the next couple of days, I'm looking for another rebound from Friday's selling pressure. The intermediate-term uptrend is still (mostly) up, but it has been very shaky and we've seen quite a bit of "toppy" studies lately, so another round of overbought readings like we kinda-sorta got on Thrusday should lead to a test of whatever short-term low we may establish now.