Friday's Short-term Outlook:  Neutral  As of Dec 4, 1115 SPX

Equity Indicators - Updates and Extremes

TUESDAY

From the Morning Report:

Profit/Loss Of Japanese Margin Traders

The Nikkei index has had a rough couple of months, unlike the S&P 500.  That is reflected in the poor performance of margin traders in Japan, which has now reached an extremely low level.  When they've done this poorly in the past, the Nikkei (and S&P 500) have often rebounded in the intermediate-term, with two big failures - the summer of 2000 and the fall of 2008.

Mutual Fund Cash As % Of Total Assets

Fund managers increased their cash holdings just a bit in October, from 3.8% to 3.9% of total assets.  Historically, that's still extremely low, with the only other periods under 4% being May 1972, March 2000, the summer of 2005 and for several consecutive months beginning in December 2006.  Expressed in terms of prevailing interest rates, the current level isn't quite as extreme.

Rydex Health Care Assets

On November 3rd, we looked at the low level of assets that traders had invested in the Rydex Health Care Fund.  Usually, that fund rallies under such apathetic conditions, and did so again.  They have apparently re-discovered that fund, however, since assets have exploded higher, now accounting for about 12% of total sector assets.  While not as good a "top" signal as low assets are a "buy" signal, this is certainly a sign that the sector has quickly lost its un-loved status.

WEDNESDAY

From the Morning Report:

Nasdaq 100 Price Oscillator

This indicator looks at where the Nasdaq 100 closes each half-hourly bar in relation to its open and close.  When there is a clear trend, it pushes the Oscillator to an extreme.  That can be a good sign longer-term, but in the short-term it often signals a temporary exhaustion, and further pushes in that direction most often get pulled back.

On Tuesday the Oscillator hit a crazy kind of extreme, and suggests that further upside attempts in the very short-term won't hold.  You can see an intraday version that is updated every 30 minutes on the Intraday Snapshot.

From a Research Report:

The latest Investor's Intelligence survey was released this morning and showed a continued deterioration in the percentage of newsletter writers who are considered bearish, from 17.6% last week to 16.7% this week.

The current reading is the 3rd-lowest percentage since 1987, with the only other weeks with fewer bears being June 6th and June 13th of 2003.

The chart below shows the daily performance in the S&P 500 after the bears initially dropped below the current level from June 2003.

It's pretty evident from that chart that the S&P had some difficulty maintaining upside momentum when so many were complacent about the market's prospects.  While there were more outright bulls in 2003 (as opposed to those longer-term bullish but expecting a correction like now), traditionally when we've seen such a dearth of skepticism it has led to sub-par returns in equities over the next month or so.

THURSDAY

From the Morning Report:

AAII Bearish %

In comparison to newsletter writers, individual investors aren't quite as optimistic.  The percentage of bears in the AAII survey decreased this week, to 34% of the total.  That's low when compared to other readings over the past year, but it is about average historically and not enough to push the indicator outside of its trading bands.

AAII Asset Allocation

The monthly survey of where individual investors are stashing their money was also released on Thursday morning, and it showed a small 2% drop in stock allocation, to 55% of total assets.  Bonds dropped off significantly, from 24% to 18%, while cash was the recipient, jumping 8%.  Overall, if we're to believe what the survey says, then individuals are still under-exposed to equity markets.

Retail Money Market Assets

This conflicts a little bit with the chart above, but weekly money market data from retail (i.e. mom-and-pop) investors showed yet another decrease.  The AAII chart above suggests that cash levels are rising, but that data is from November, and is only an estimate of what people *said* they did.  The chart below is weekly data, with little delay, and shows actual cash balances.

Expressed as a percentage of the S&P 500's market capitalization, money market levels have dropped from more than 14% this spring to just over 8% lately.

We can see from that chart that the only historical comparison is from the early 1980's, when money market levels also soared to more than 14% of the S&P 500's value near the market bottom.  The chart below shows what happened going forward when money market levels dropped to just above 8% as the market recovered.

FRIDAY

From the Morning Report:

Odd Lot Purchase %

Odd lot trades are those for 100 shares or less, and is a reflection of the sentiment of very small traders.  Since the March low, when more than 75% of odd lot volume is for purchases (instead of sales), the S&P has suffered a 1% or more drop within a few days nearly every time.  It just triggered that extreme two days ago.

Already, though, these traders have become nervous and are close to moving down to under 35% purchases, which would be a decent short-term buy signal.

AMG Data Weekly Fund Flows

The latest updated from AMG Data shows another week of tepid flows to equity mutual funds, which suffered a second straight week of outflows.  That marks the fifth week out of the past six that investors have shown a net withdrawal out of equity funds (excluding ETFs).  Unlike for bonds (see below), there is little evidence of excessive optimism here on a longer-term time frame.