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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 turned very quickly from where they
were in mid-January. We looked at a couple of studies
in early February that suggested we could be very close to a
multi-week low, but they didn't quite trigger as prices
recovered more quickly than they "should" have. That
leaves us without much of a bias for a multi-month time
frame.
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
For the most part, Rydex index mutual fund traders follow
the price action of the S&P 500. That has changed a
bit since last July, when they've been more willing than
usual to trade against the immediate trend, but overall they
still tend to go into bullish funds on up days and bearish
funds on down days.
About five or six years ago, we created the Rydex Enthusiasm
Index to try to track times when these traders were more or
less inclined than they "should" be to move into a bullish
or bearish fund.
In other words, if the S&P 500 rises by 2 points, but we see
a huge swing into the bullish funds, then we'd say that
traders are too optimistic. But if the S&P rose by 2%
and we saw that kind of swing, then it would be expected.
The most interesting readings we get are when the S&P makes
a significant move (like yesterday), but traders do the
opposite of what they should (like yesterday). Despite
the greater than 1% loss in equities, the Enthusiasm Index
remained above +0.5, in extreme territory.
Since 2000, this has happened 21 times (including 3 times in
January). And usually, the Rydex traders were
ill-advised to be so optimistic.
Over the next week, the S&P 500 showed a positive return
only 29% of the time, averaging -1.1%. Two weeks
later, it was positive 24% of the time with a return of
-1.7%. Not surprising, the instances were clustered
during the bear markets in 2000-2002 and since 2008, and as
a result the risk/reward was quite volatile. Over the
next week, the maximum gain the S&P enjoyed averaged +2.0%
while the average maximum loss was -3.6%.
It works the other way, too. When the S&P rose more
than +1%, but the Enthusiasm Index was less than -0.5, then
over the next week the S&P was positive 67% of the time,
with an average of +1.1%.
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Equity Market Indicators
Notes: During the volatile correction of the past two weeks, we saw a spike in our Bullish (for the market) indicators to 30%, and the Bearish very nearly reached 0%. That coincided with the low (so far), though as we noted at the time, when the indicators get that extreme, they tend to keep going, and we usually see at least 50% bullish indicators at the ultimate low. Currently, they're back to about even and not telling us much either way.
More history:
* New extreme
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Bonds, Commodities and Currencies - Updates and Extremes
Public Opinion On The Swiss Franc
Currency-wise, the US Dollar has had the hot hand lately, and sentiment has swung to reflect it. Most of what we follow for sentiment on the Dollar is at an extreme level of optimism, but so far it hasn't been enough to override the fundamentals.
As a result, traders are leaning against other currencies (obviously), and sentiment is souring fast on several of them. The chart below is our Public Opinion data on the Swiss Franc, which has now moved to one of its most pessimistic levels of the past five years.
The green arrows on the chart of the Franc show that the other few times sentiment got this bad, the Franc quickly rebounded over the next 1-3 months at least, and any additional short-term weakness was quickly made up.
The Franc has been in an uptrend all during this time, and as we know, extreme pessimism during a long-term uptrend tends to give good risk/reward trades for betting on a resumption of the rally.
That trend component is important, as the chart below shows. This one zooms out and gives more historical context, and we can clearly see that when the Franc was trending lower prior to 2001, we got much deeper readings of pessimism before the currency managed to bounce.
It would be a better setup if speculators were more heavily short (such as they are in the British Pound and the Euro), as that can help trigger very quick rallies.
Still, I don't see any signs that the Franc's uptrend has ended, so this kind of pessimism suggests we should see another rally attempt soon, and if we break the downtrend from January I would expect it to carry higher for a few weeks at least.
Jason Goepfert Founder, Sundial Capital Research, Inc.
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February
24, 2010,
7:50am EST
Neutral
From Feb 19,
1112
SPX
