Posted 01/17/12 7:15 PM ET by Jason Goepfert
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1 The Baltic
Dry Index has been in freefall, which many are taking as a negative sign for
stocks. Historically, though, big drops in that index to multi-year lows
have led to better-than-average returns in both the S&P 500 and Shanghai
Composite.
2 Newsletter
writers are showing one of their highest net long positions in the Nasdaq in
years. That has typically preceded some trouble for technology stocks.
3 The US
Congress is back in session, with
record low approval ratings. This is just a reminder that
studies have shown that stocks do much worse when Congress is in
session...especially if it's an unpopular Congress.
4 Last Tuesday,
we mentioned overly bullish Public Opinion in
Orange Juice, and that showed the biggest drop in Opinion this week as the
contract pulled back.
Platinum gained the most attention among bulls, pulling Opinion out of
overly pessimistic territory.
The large gap up Tuesday morning surprised a lot
of folks, so the intraday decline was more in line with expectations.
Price action is OK, but technology stocks in particular are worrisome, as we
head into the worst time of the year for them, with overly bullish sentiment.
We're looking for the Nasdaq 100 to stay below 2400, but aren't willing to bet
against it should it buck convention and rally above that area.
Bottom Line
The market is torn between good momentum and some
questionable seasonality and indicator values (see the "Active Studies" below).
The momentum rules for now, and until price shows some signs of cracking, the
negative signs will just be a heads-up and not necessarily cause for action.
We'd be more worried should the S&P 500 close below 1280.
There has been a lot of concern over the behavior
of the
Baltic Dry Index (BDI). This is an indicator we have discussed several
times over the past few years, usually with very mixed results in terms of its
predictability.
It's getting attention now because it has cratered
40% in a few weeks, and is trading at a two-year low.
Many consider the BDI to be a better predictor of
China's Shanghai Composite index than the S&P 500, so the table below shows how
the Composite performed in the months after the BDI collapsed to a two-year low.
As we can see from the table, results weren't too
bad, in fact they were a bit better than random. To see the same results
for the S&P 500,
click here for the table.
If we just look at the largest monthly declines in
the BDI, then the figures change. In those cases, stock market performance
in the
S&P 500 and
Shanghai Composite are a bit worse than random.
If we combine the two and look for large monthly
drops to a two-year low, then stock market performance was mixed-to-poor during
the next 1-3 months, but then good afterward. We wouldn't read a whole lot
into this indicator's recent decline.
«
continued from previous column
Newsletters Jump Into The Nasdaq
A
couple of weeks ago, we looked at how traders in the Rydex family of mutual
funds had abandoned the tech sector. Not much has changed there, and it's
still likely a bullish factor longer-term.
Mark Hulbert's organization looks at the
recommended allocation to the Nasdaq among a sample of newsletters.
Currently, they are 62.5% net long that index.
As we can see from the chart, that's one of the
highest levels of the past few years. The other instances saw the
Composite trip up more often than not, with the only real exception being the
December 2010 momentum market where everything but trend-following failed.
The Hulbert charts we post to the site have a week
delay. To receive daily access with no delay to their sentiment data,
please contact John Kimble at
Hulbert Financial Digest.
Also, be sure to visit Marketwatch to
learn about other premium products they offer.
Most of our indicator groups are showing more
bearish (for the market) than bullish individual indicators. We don't have
a large number of bearish extremes, but as of January 17th we have 0% at a
bullish (for the market) extreme. That's unusual, and often precedes a
market pullback...but it would be more of a probability if we had more than 30%
of our indicators at a bearish extreme at the same time.
Most of the broad sectors are showing at least
neutral sentiment, with a few well into overbought territory, especially a
couple of previously beaten-down ones like Financials and Housing. We
typically see a pullback after those sectors reach these levels.
See
this
Data Brief for more background on the Sentiment Scores
Traders just aren't tiring of selling the Euro,
with short positions hit record highs week after week. The Pound is
nearing similarly pessimistic territory, as traders head to the US Dollar.
Despite a relentless slide to multi-year lows, sentiment towards Natural Gas has
been fairly tame. It's showing pessimism, for sure, but not the deep
levels we'd expect to see after such an extended decline.
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