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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, or if
we get another thrust lower that could set up a
higher-probability multi-week low.
Sentiment:
Trend:
Mostly neutral.
Still pointing up. Sup / Res:
Other:
Resistance at 1100-1110, support
at 1050-1060. Nothing notable.
Equity Indicators - Updates and Extremes
Heading into January, one of the most worrisome aspects of
sentiment we discussed was the behavior of options traders,
and specifically the smallest among them. So it makes
sense to keep close tabs on them now to see how they're
acting during the correction.
A couple of weeks ago, we finally saw a spike in interest in
protective put purchases, which is a good sign from a
contrary perspective. Even better would be to see a
jump into "extreme fear" territory, but we weren't seeing
anything even remotely like that.
That hasn't changed, as last week they actually reduced
their concentration on protection.
What is notable about this middling volume in put options is
that when we go back and look at all other major
intermediate-term lows during the past decade, all of
them occurred when put volume from the smallest options
traders accounted for more than 20% of total volume.
The good news (for bulls, anyway) is that we're far from the
really disturbing readings from December and January when
15% or less of total volume went for protection. The
bad news is that we're still not getting the kinds of
readings that has accompanied prior lows.
Switching from amateurs to professionals, we see a somewhat
similar picture. The Survey Of Manager Sentiment by
the National Association Of Active Investment Managers (NAAIM)
shows a big reduction in bullish positioning.
Near the peak in January, the net position of these managers
stood at 85% net long. As of last week, that dropped
to 30%, the lowest since the July market bottom.
That's probably a good sign, though one note of caution is
that managers aren't very confident about their newfound
lack of optimism. The standard deviation of responses
is historically high (meaning there isn't much of a
consensus).
In February and March, when their net position was extremely
low, confidence was above 50%. In July, when their net
position dipped under 20% (the dotted green horizontal line
in the chart above), confidence was at 47%. This week,
with their net position dropping from 47% long to 30%,
confidence was only at 31%.
In order for this to be a solid contrary indicator, it would
help to see a lower sense of optimism (less than 20% net
long) and confidence rising closer to 50%.
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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 on Monday the Bullish moved to 30%, 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
Nothing notable for today.
Jason Goepfert Founder, Sundial Capital Research, Inc.
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February
16, 2010,
7:20am EST
Neutral
From Jan 27,
1090
SPX
