Short-term Outlook:  Neutral  From Feb 26, 1107 SPX

Equity Indicators - Updates and Extremes

Smart / Dumb Money Confidence

Near the February low, the indicators that make up our Dumb Money Confidence had retreated enough to push it down to 41%.  That's not quite extreme territory, but certainly more encouraging than the 75% it had reached in January.

During the rally since then, we saw a couple of stretches where the Dumb Money didn't move at all for days (even weeks) on end.  That changed during mid-March when it spiked above 70%, then it dipped and went flat again.

We've now seen another push above 70%, and depending on how the next couple of days ago, it could reach 75%-79% by the end of the week.  That would be a definite, and imminent, danger sign.  Especially with the Smart Money below 30%.

Already, we're seeing an unusual situation with both measures at opposite extremes.  This is only the sixth time in 15 years that the Smart Money has been under 30% and the Dumb Money above 70% at the same time.

Here's how the S&P 500 fared going forward when we've seen this combination in the past.

The results aren't disastrous (excepting the August 2000 occurrence), but the theme is that any further short-term gains were erased every time.  The S&P did manage to tack on an average of another +2% or so before rolling over, but each time it did fall back before (maybe) resuming its uptrend.

Because of that, the risk/reward profile over the intermediate-term of three months was not positive.  The average maximum decline during that span was -6.1% compared to an average maximum rally of +3.0%.  In each instance but one (November 2004), the max decline over the next three months outweighed the max gain.

This is consistent with several other indicators we've looked at lately - stocks may continue the unrelenting push, but it's a game of a musical chairs, and when the music stops the one left standing will likely fall hard.

OTC (Pink Sheet) Volume

One of my favorite guides for determining the level of long-term speculative flows is the eagerness of penny stock traders to ply their craft.  When we see traders of the lowest-of-the-low start to get excited about trading what are essentially just lottery tickets, then we know we're headed for trouble.

We've looked at this a few times over the past nine months or so, and none of those times were we able to determine that there was speculative excess entering the market.  From a long-term perspective, these traders were behaving in a pretty muted fashion.

That still hasn't changed.

Given some of the other sentiment measures we follow, such as from the options market, I thought there was a good chance we would have seen penny stock volume explode higher during March.  But it didn't happen.

There was an increase across all metrics (share volume, dollar volume and turnover), but it was relatively minor and still below the fall 2009 highs - much less the 2006 highs.

I suppose if we really want to search for something that might be troubling, we could point out the year-over-year change in dollar volume.  Since it had sunk so low in early 2009 (which seemed like a good reason at the time to expect an important market bottom), the yearly change has mushroomed to 240% (i.e. dollar volume is more than three times higher now than it was in March 2009).

There have been two other times we've seen the year-over-year change spike higher:

The first one pretty much marked the peak of the technology hysteria in 2000.  The other was a situation more similar to now in the recovery from the 2002 bottom.  The Nasdaq Composite did manage to tack on another few months of gains afterward, though those were eventually given back during the first half of 2004.

I'm not too concerned about this, simply because we're coming off such a low base from 2009.  I would be much more worried from a long-term perspective if we suddenly see a big spike in volume in these stocks, and so far we're just not getting it.