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Go to: Top | Short-term Outlook | Int-term Outlook | Equity Updates | Indicator Summary | Commodity Updates
Short-term
Outlook (1-5 Days):
Go to: Top | Short-term Outlook | Int-term Outlook | Equity Updates | Indicator Summary | Commodity Updates
Intermediate-term Outlook (1-3 Months):
Today's Update: We will remain Neutral.
Why: During the market's breakdown in early
July, we saw a number of examples of excessive pessimism,
such as deeply
oversold conditions, and give-up among
Rydex traders and
individual investors. After sentiment recovered
from that during a 10% rally, we saw some encouraging signs,
such as the advance/decline line
making a
new all-time high. But indexes like the S&P 500
remained mired in a pattern of lower highs and lower lows,
so price action was dubious. Since then, we saw some
worrisome signs, some of which the media has grabbed onto,
like
the Hindenburg Omen. Now stocks are
threatening to break down under support. There is
anecdotal evidence of too much pessimism once again
(mainstream press about mutual fund flows into bonds instead
of stocks, firms rolling out "fat tail" funds, and
celebrities warning about pending market crashes and
advising the masses to stay away from stocks). Lately,
some of our indicators have started to reflect that,
including a dearth of money in
leveraged long funds at Rydex and investors clamoring
for
"fear trade" currencies. According to our
indicators, though, we're not yet at a pessimistic extreme,
and given the poor price action we're not eager to add
exposure.
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Sentiment (
Trend (
Support/Resistance (
Other (
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Short-term Outlook
| Int-term Outlook |
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Indicator Summary |
Commodity Updates
Equity Indicators - Updates and Extremes Over the past
couple of days, we've discussed the idea that investors aren't
necessarily extremely pessimistic just yet, but they are becoming
apathetic. Instead of
betting heavily on more downside to come, they're simply exiting the
long side of the market, and probably going to cash or using the money
for other purposes. More evidence of
that comes from the latest survey from the American Association of
Individual Investors (AAII), where the percentage of those looking for
the market to rise plummeted to nearly a five-year low.
When you
consider what we've been through during the past few years, this kind of
give-up is astounding. Since the
inception of this survey in 1987, there have been 48 other weeks where
investors were this non-bullish. The table below shows the
performance of the S&P 500 going forward: 1 Week Later 2 Weeks Later 1 Month Later 3 Months Later Looking out
three months later, the S&P was positive 47 out of 48 weeks, a pretty
impressive record. The skew between the risk and reward was
clearly tilted to the upside as well.
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Short-term Outlook
| Int-term Outlook |
Equity Updates |
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Equity Market Indicators
Notes: In late June, we got a spike in bullish (for the market) indicators above the 30% level, similar to what we saw in late May. It wasn't quite a spike in extremes like we've seen at other major lows, but it was apparently enough for the buyers to step in, at least temporarily. While the percentage of our indicators at a bullish extreme have drifted lower since then, so has the number of bearish ones. For the past few weeks, we have seen few true extremes, and many that conflict with one another.
More history:
* New extreme
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Bonds, Commodities and Currencies - Updates and Extremes
Much ink has been spilled arguing whether or not bonds are in a bubb...a bubb...jeez, I can't even say the word, I'm so sick of hearing about it. I've even sick of the whining from people who are sick of hearing about it.
Instead of tackling the "b" word, let's just take a look at some of the measures we follow and see if there's any evidence of an extreme in optimistic opinion about bond prices continuing their rise.
Market Vane and Consensus, Inc. Sentiment Surveys
The two granddaddy sentiment surveys cover different trading populations, but usually move pretty closely together in terms of bullishness.
Market Vane mostly covers investment advisors and Commodity Trading Advisers, while Consensus monitors brokerage house analysts and independent advisors.
The black dotted horizontal line on the charts highlight the current level.
Both surveys are showing quite a bit of bullishness, especially the Consensus survey. Even that one, though, has seen a dip in the percentage of bulls even while bonds have continued to rally.
A couple of weeks ago, the bulls were near 80%, which is about the maximum that we ever see. Historically, when it reaches that levels, bonds at least pause in the short-term, but no such luck this time.
AAII Asset Allocation and Wall Street Strategist Asset Allocation
Going from what people are saying to what they're doing (or at least saying they're doing), let's look at how much money individuals and pros are stuffing into bonds, as a percentage of their overall portfolios.
According to AAII, individual investors are allocating 24% of their total portfolio to bonds or bond mutual funds. That's down a bit from the 25% they were at, but still it's clear from the chart that they're as enamored with bonds as they have been at any other time in the past 23 years.
As far as Wall Street goes, strategists have a suggested allocation of right around 30%. That is historically high, but a significant reduction from the nearly 40% allocation they were recommending in the spring of 2009.
The chart below shows the net position of small speculators in 30-year Treasury Bond futures. These are traders who don't trade enough size to be considered "large", which is currently 1,500 contracts.
From the chart, we can see that it's been awhile since small specs were so bullish on bonds. In fact, there have only been a handful of weeks since 1993 when they were more net long than they are now.
The data has a decent record as a contrary indicator, but by no means perfect. Specs were very net long in mid-1998 right before bonds ran up, so kudos to them as they timed it just right. Otherwise, though, their record is consistent at being very net long or net short right before bonds were about to decline or rally, respectively.
Options data on bonds isn't nearly as consistently useful as it is for stocks, probably because it's more of a professionals game. Not that they're excused from being contrary indicators, but they tend to use more complex strategies, of which options are only a part.
Anyway, the chart below shows the 10-day average put/call ratio for 30-Year Bond futures.
For whatever reason (whether they truly are optimistic or not), traders have not been trading many put options relative to calls over the past couple of weeks.
The current 10-day ratio of only 0.67 is the lowest in a year, and one of the lowest we've seen in the 12 years I've been collecting the data. Similar to the CoT data above, though, its record as a contrary indicator is spotty.
Let's take a look at the TLT bond exchange-traded fund and see if the put/call data suggests anything different:
Nope, same story here. The 10-day put/call ratio is scraping along near its lowest level in two years. This one seems to do a little bit better job of being a contrary indicator, though it was also very low in late 2008 right as TLT ran higher.
Now let's flip it around and look at the TBT inverse bond ETF. This fund rises as bond prices fall.
True to form, we're also seeing traders bet heavily against the TBT fund, with the put/call ratio close to its highest level in nearly two years. This means that traders are (probably) buying puts on the inverse fund, which is a bet that bond prices will continue to rise.
Now let's move on to traders in the Rydex series of mutual funds. Rydex carries two established funds which bet on rising or falling bond prices.
The chart below is a Bull/Bear Ratio which divides total bullish bets by total bearish bets.
The ratio is fairly high, after having spiked up over the past couple of weeks. But it's not quite to where it was at past peaks in the ratio.
Once again, I would say that this is a decent contrary indicator, though by no means perfect. We tend to see very spiky behavior in this data, so it's quite possible that over a 2-3 day time period, we could see it jump up to 0.40 or dive down to 0.15. If we see the former, it will be a decent indication to look for at least a short-term dip in bonds.
Short Interest
I'm not a big fan of short interest, which is why I rarely discuss it in these Reports. There are just too many strategies that involve short-selling that have no relation to an overall bearish posture on a stock or index.
That said, below we show the current short interest in the TLT bond ETF, expressed as a percentage of the shares outstanding in that fund.
Short interest is currently very low, at only about 40% of shares.
For the most part, when short interest has been extremely high, TLT has risen, but the converse isn't as true. Short interest was also low in June of last year, but TLT continued to rally over the next couple of months.
Now let's again flip it over and look at the short interest for the inverse bond fund, TBT.
As expected, we're seeing the opposite situation here.
Short interest is now about 10% of total shares outstanding, which isn't a lot, but relative to the fund's history it's at a record.
The problem for timing purposes is that it has been high for several months now, and has not resulted in any short-covering rallies (which would mean a rise in TBT, which would mean a fall in bond prices). And the last time we saw a spike in short interest, in June of 2009, TBT dropped meaningfully afterward. This does not appear to be a good indicator of sentiment for the bond market.
Overall, does it look like bonds are in a bubble of excessive optimism? Not really. Not a bubble, anyway. It does look as though optimism is high, which is to be expected. Sentiment surveys, asset allocations, put/call ratios, futures positioning and mutual fund flows all point to a market that has a good deal of high expectations built in. That suggests a relatively high likelihood of further price gains being given back at some point, and probably sooner rather than later.
Jason Goepfert Founder, Sundial Capital Research, Inc.
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August
26, 2010,
7:40am EST
Neutral
Since July 20, 1057
SPX
Bullish For The Market
Bearish For The Market
