Short-term Outlook (1-5 Days):  Neutral  From Apr 23, 1215 SPX

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Equity Indicators - Updates and Extremes

Investor's Intelligence Bull Ratio

Last week, we took a brief look at how newsletter writers had actually become more bullish despite a drop in the market.  While the percentage of bears had been low for a while, even the bulls were becoming extreme.

A lot has changed in a week, so let's check the Bull Ratio in the latest Investor's Intelligence survey to see how newsletters reacted:

Not surprisingly, their renewed bullish fervor got tamed somewhat.  The Bull Ratio dropped by just over 12% (that's a relative figure, meaning there was a 12% reduction from 75% last week, to 66% this week).

More surprising is that even during this latest bull market, there have been two weeks that showed larger one-week drops in bullishness (7/10/09 and 1/22/10).  The one in July marked the end of that correction, while the one in January led to a few more weeks of selling pressure.

Historically, a one-week 12% drop in net bullishness isn't all that extreme, and seems especially modest given the events of last week (remember, the survey was taken before Monday's giant rebound).

Rydex Sectors Above 50-Day Average

Back in early April, we took a look at an indicator that's kind of a breadth measurement for sentiment in the Rydex family of mutual funds.

At the time, 85% of the funds had assets higher than their average over the past 50 trading days.  That rare of a reading typically meant weakness over the next week.  Except for a little over a day of selling pressure following that, though, stocks held up well...at least until they started to stop a few days after that.

In a very short amount of time, traders have swung to the opposite extreme.  Despite a relatively modest day yesterday (on a closing basis, anyway), the percentage of sectors with above-average assets sunk from 12% to only 6%.

Like the converse of the extreme we looked at in early April, the thrust in the Rydex indicator didn't necessarily pinpoint exact turning points in the market, but it was often a good heads-up that a tradeable reversal was on tap relatively soon (with one exception).

The following table gives the other dates that the measure dropped to the current extreme, along with the S&P 500's performance over the next month.  The last column highlights the number of days it took before the S&P formed a low before a meaningful bounce.

We can see from the "Max Loss" column that there was some volatility as the market hit oversold and then tried to hammer out a low.  With an average loss of -4.6%, buying early caused some immediate pain.

At least it was short-lived in most cases.  The S&P put in a decent low within 6 trading days every time except once, which was a real failure in June 2002 as the market continued a slow-motion crash into July.

Given the other studies we've looked at over the past few days, it's another feather in the cap of the "intermediate-term rally after likely short-term weakness" idea.

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