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Short-term
Outlook:
Intermediate-term Outlook:
What: We will remain Neutral for now.
Why: On January 8th, the
Dumb Money Confidence hit 75%, and nearly every time we've seen
that kind of extreme in the past 15 years, any further
short-term strength (over 2-4 weeks) was reversed
longer-term (over 1-3 months). Now that that's
happened again, we're getting conflicting
studies about whether the price action over the past two weeks is
a sign of a larger trend change. We don't have an
overwhelming number of
signs that we have seen a major market peak, and several
sentiment measures have turned very quickly from where they
were a couple of weeks ago. The quick failure of the
recent multi-month low and double 1% up days, as we discussed
last week, could actually turn out to be a multi-week positive
(as ironic as that sounds). Last week's late reversal
took some air out of that argument, so right now we're
waiting to see if the market responds positively to a
scattering of oversold intermediate-term indicators.
Sentiment:
Trend:
Mostly neutral, though getting a few oversold signals.
Rrising 200-day avg;
higher highs/higher lows. Sup / Res:
Other:
Resistance at 1100-1110, support
at 1030. Nothing notable.
Equity Indicators - Updates and Extremes
Rydex Assets Above 50-Day Average
Yesterday we took a look at the distribution of assets among
a group of Rydex sectors. What we saw was that with a
few exceptions, assets in general were heading south.
We can see that clearly reflected in a breadth type of
indicator we track for the Rydex funds, which looks at the
percentage of sectors that have assets trading above the
average level of the past 50 days. As of yesterday,
that dropped to 15%.
Typically, oversold breadth measures like this work best in
bull-market environments, but even during the tough stretch
from 2007 - 2009, it worked pretty well when it reached this
depth.
Over the past week, we've seen a couple of different studies
suggesting we could be very close to a multi-day or
multi-week bottom. Friday's meager reversal wasn't a
great development, since it sucked a lot of the air out of
that potential, but measures like this one argue that even
if we're in the midst of a new downleg, we could have more
of a recovery before it resumes.
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Equity Market Indicators
Notes: Since the March low, we've seen a few times where the percentage of our indicators at a Bullish (for the market) extreme jumped to 16% or so, and/or the percentage at a Bearish extreme dropped under 5%. Each time, the market rallied almost immediately.
Now we have the Bearish indicators well under 5% and the Bullish above 25%, the widest spread since last March. If the market continues to weaken from here, then it would suggest a definite change in character and in that case we'd be looking for the Bullish indicators to spike to 50% or more before becoming too anticipatory of a sustained rally.
More history:
* New extreme
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Bonds, Commodities and Currencies - Updates and Extremes
US Dollar Public Opinion, and Small Trader Futures Positions, and Rydex Asset Flow
The biggest focus for traders, outside of the major equity indexes and sectors, is the US Dollar.
That came into sharp relief yesterday when news about Greece hit the wires, as traders scrambled to see how the Dollar was acting. This is the "risk trade" that has become a dominant force in the market. Dollar down = good for stocks; Dollar up = bad for stocks. This is not a consistent historical relationship when we look back decades, but it has over the past year, and it has been exceptionally strong over the past month.
The chart below shows a few of the guides we track for the Dollar. It is immediately evident that sentiment has swung dramatically from where it was last fall, and in fact we're seeing some of the most optimistic levels of the past five years.
In terms of small speculators in Dollar futures, we're seeing an all-time record high in their net long position. Of course, small speculators are just a drop in the bucket in that market; they hold only about 10% of all outstanding long contracts.
Large speculators (usually trend-following futures trading funds), however, are a huge factor, and they are now holding 79% of all long positions. That's the 2nd-highest in history behind only November 2005. That wasn't a great time to be holding Dollars along with the funds.
The other measures confirm that "dumb money" is exceedingly optimistic about a trend change in the buck, and they've put their money where their mouths are. Surely, this could be something like September 2008 when sentiment had also become quite optimistic, and we saw nothing but a short (though severe) dip before a ramp higher in the Dollar.
That was during the credit crisis, and perhaps if this sovereign debt situation turns even uglier and spreads, then we'll see another stampede into perceived safety. That would include a rising Dollar, and it would overwhelm any other sentiment, technical or fundamental measures.
As long as we're in a "normal" market, however, we should see a general decline in the buck, which would, assuming the recent correlations hold, bode well for stocks.
Jason Goepfert Founder, Sundial Capital Research, Inc.
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February
10, 2010,
7:45am EST
Neutral
From Jan 27,
1090
SPX
