The Survey Says…Neutral!
Tuesday, April 20th, 2004 9:30pm EST
Is It Possible to be Excessively Neutral?
Bottom Line: Two sentiment surveys are showing an extremely large number of neutral respondents, the past few times of which have lead to very choppy market conditions going forward.
If you have the feeling that there is more uncertainty than usual out there right now, you have a lot of company. A couple of the surveys we follow are showing very unusual amounts of neutral respondents, and the last few times that has happened, it has lead to fairly predictable outcomes.
The latest survey from lowrisk.com includes responses entered on their web site as of this past Sunday evening, and they tabulated 22% of the respondents as being bullish, 37% as bearish and a whopping 41% as neutral (neutral being defined as the Dow Jones Industrials Average not being more than 2% away from the current price 30 days from now). This is not an excessive display of pessimism, but it most certainly is a display of uncertainty – in fact, the survey has shown more than 40% neutral responses only one other time in its seven-year history, that being the week ended 04/26/98.
If we look at the neutral percentage in the Investor’s Intelligence survey, a similar picture emerges. Over the past four weeks, the survey has averaged nearly 30% of its respondents being neither bullish nor bearish – the highest such percentage since August 1997, and July 1992 before that.
Looking at each of these examples of extreme uncertainty, they lead to a very choppy market over the next few months, with some dramatic declines and rallies, before a sustainable trend emerged. This makes sense when you think about it. If there is such a large group of undecided traders, theoretically sitting out the action while the smoke clears, then there is a dedicated group of bulls and a dedicated group of bears, each firing at each other and trying to press their bets each time they believe they have an edge. As they volley, the market swings wildly, and no clear direction emerges until the “neutral” camp decides to join one side or the other. I would not at all be surprised to see a similar situation unfold this time around, and I think it provides a reasonable template to approach the coming months.
Another Important Short-term Tell
Bottom Line: Our TICKs are extremely oversold, and in the past how the market has acted the week after told the tale for the intermediate-term as well.
Once again, the market is facing an important test in the short-term which should help decide its prospects for the intermediate-term. Breadth has been notably poor over the past two weeks, shoving some of the measurements we post to the site firmly into oversold territory. Up issues, up volume and TICKs are all now suggesting the selling is overdone.
The chart below is the 10-day cumulative NYSE TICK as posted to the site (this is different from the one I posted in a comment the other day, which tracks movement over the prior 3 days).
We are currently seeing the most negative reading since July 23rd, 2002. The importance of the next few days is this: every time the cumulative TICK has gone below 500 over the past three years, if the S&P 500 wasn’t at least 2% higher after 5 days, it marked some type of a top (May 2001 and January 2003). If it was at least 2% higher, then it marked a spot where the risk/reward was firmly in favor of the long side (July 2002, September 2002 and August 2003). Similar to how the market reacted off of the lopsided selling days I noted last week, it appears as though the short-term reaction here could be telling for the intermediate-term as well.
Conclusion
In an intraday note this morning, I pointed out that the all-exchange, all-option put/call ratio stood at 0.46, a very low reading last matched at the short-term high on April 6th. The extremely sharp decline this afternoon took care of that bout of speculation and the closing figures were about average. That spike down also knifed through the 1120ish area on the S&P cash index I have been noting over the past week, although at its current level of 1118, one could argue that it is still within the arbitrary boundaries of the “ish” portion of 1120ish.
A few of our shortest-term measures have reached extreme oversold territory, and it may pay for very short-term traders to look for long trades on any large gap down in the S&P tomorrow morning (let’s consider 5 points or greater as “large”). If we see anything other than that, I would want to wait until more of our measures indicated that things were overdone. More caution is warranted now that we’ve lost 1120, and I want to either see deeper oversold conditions or a recapture of that level before feeling better about looking on the long side.
On a side note, we have received quite a few questions about the most recent billing on subscribers’ statements. As I pointed out a month ago or so, we have now lowered our subscription rates to only $19 per month, $49 per quarter or $189 per year. If you were being billed $30 or $39/month in the past, then you are now being billed $19/month as of April 1st – with no reduction in service. And again, if you wish to change to a quarterly or yearly billing and save even more on your subscription, simply email admin@sentimentrader.com and let us know.
Jason Goepfert
President and CEO
Sundial Capital Research, Inc.
Disclosure: no positions
This disclosure is not intended as trading advice in any form. It is meant as a note to subscribers that the author may have a position directly affected by the market outlook reflected in the commentary. Although the author takes great pains to remain objective in any commentaries, it is only fair that readers should know that the author may have taken positions in accordance with his market outlook. Positions can and do change at any time, without notice to the reader.
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