May 6, 2010, 7:40am EST   

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Thursday's Need-To-Know  

Smart / Dumb Money Confidence

 

* Yesterday morning's selling triggered some teeny-weeny panic readings, and pushed more of our measures into oversold territory.  Given that and the drying up of selling interest by the close, the very short-term pattern usually resolves upward.

 

* During the latest downside volatility, newsletter writers and individual investors increased their positive outlooks.  Individuals still see little need for cash reserves (very much like mutual fund managers apparently).

 

* Corporate insiders are emerging from earnings-related quiet periods, and have picked up their buying - but not enough to overtake larger selling pressure.

 

 

 

The Dumb Money is 63% confident in a rally.

The Smart Money is 42% confident in a rally.

 

Smart/Dumb Confidence

View longer history

 

 

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

 

 

 

Recent Studies:

Surge in buying climaxes (5/03): Bearish

Small options traders are bullish (4/19): Bearish

 

What:  We will remain Neutral for now.

 

Why:  Whenever we've seen a big down day over the past year or so, the market had typically rebounded quickly thereafter, usually gapping up the next day as we discussed yesterday.  When it gapped down instead, and then kept selling off, we started to actually see a little bit of panic for the first time in quite a while.  That increased the number of our oversold indicators, and led to a few more reasons to expect at least a temporary reprieve:

 

* Spike higher in put/call ratios (see here and here)

* 2% loss and then decreased selling pressure (up 9/10 times by a day later)

* Up Issues Ratio under 20% two days in a row (S&P up next day 13/17 times)

* Rydex RSI at -99 (S&P positive over next week 13/17 times)

 

Obviously, traders are extremely skittish about the Eurozone issues, and any new headlines there will swamp whatever technical setup we may have.  But excluding a major development overseas, the probabilities do seem to point higher over the short-term, with any additional short-term weakness (such as a probe of 1150ish) likely being retraced in the days ahead.

 

Current S&P futures:  +3 points at 1167 

Sentiment:

Trend: 

Oversold.

Lower lows, lower highs.

Sup / Res:

Other:

R: 1180; S: 1150

Neutral.

 

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Intermediate-term Outlook (1-3 Months):  Neutral  From Feb 2, 1104 SPX

 

 

What:  We will remain Neutral for now.

 

Why:  In early January, the Dumb Money Confidence hit 75%, which was another successful "protect your gains" warning sign.  By early February, we went over several studies suggesting we were very close to a good multi-week buy signal, but they just missed triggering.  In the process, there have been some more encouraging signs (such as no overwhelming number of signs that we have seen a major market peak, the advance/decline line at a new all-time high and extreme momentum in small-cap stocks).  The spread between the Smart Money and Dumb Money has moved beyond -40%, the largest negative spread since early 2007, so there are some definite intermediate-term warning signs.  We've been waiting since then for either a surge in speculative activity, or waning momentum.  We got the former, with a surge to 75% in the Dumb Money.  But the price momentum has been historic, which usually means even higher prices during the months ahead, and we have not seen much evidence of it waning yet, so it still appears too early to bet against this recovery on a multi-week or multi-month time frame.

 

 

Recent Studies:

Historic price momentum (4/23): Bullish

Extreme Indicator Score (4/16): Bearish

Earnings season after a rally (4/08): Bearish

Smart/Dumb Money extreme (4/07): Bearish

Surge in new highs (3/18): Bullish

Thrust in Up Volume (3/12): Bullish

Sentiment:

Trend: 

Overbought

Still pointing up.

Sup / Res:

Other:

R: 1200-1225; S: 1110

Nothing notable.

 

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Equity Indicators - Updates and Extremes

 

AAII Asset Allocation

 

Yesterday, we took a look at the latest Investor's Intelligence survey of investment newsletter writers.  Despite a drop in stocks last week, the percentage of those looking for a rally not only rose, but pushed into "extreme optimism" territory for the first time since the bull market began.

 

Individual investors seem similarly unfazed with the latest bout of volatility.  The latest poll from the American Association Of Individual Investors (AAII) showed a tiny drop in net bullishness, despite more than a -2% loss in the S&P during the survey period.

 

Over the past two weeks, the S&P has lost more than 3% (using weekly closing figures coinciding with the survey periods) but during that time the percentage of bulls has stayed about the same (from 38% to 39%) and the percentage of bears has actually decreased (from 34% to 29%).

 

On a longer-term time frame, the monthly asset allocation data was also updated.  It didn't show too much of a change - a slight increase in stock ownership, and a similarly small bump up in cash (bonds lost a little).

 

 

The dotted horizontal lines highlight the current allocations.  While stock ownership has rebounded 50% from its 2009 depths, it still remains about average when looking at the past 23 years.

 

Cash, however, remains exceptionally low.  That didn't seem to matter during the latter 1990's, though as we've looked at before, during the last bull market from 2003-2007, dips this low in cash tended to lead to multi-month trading-range types of markets (granted, stock ownership was significantly higher at those points).

 

 

InsiderScore.com Buy/Sell Ratio

 

For the past few weeks, corporate insider activity has been light due to the quiet period many were subjected to as earnings reports were released.

 

Now it's picking up again, and on a week-to-week basis, insider buying jumped 140% while selling increased only 70%, according to InsiderScore.com.  The bad part about that is that the buy transactions were quite small compared to the sells, so the overall buy/sell score that we post to the site not only decreased, it went back into extreme territory.

 

 

Prior to the recent bull market, such extremes were pretty good at pinpointing a market that was about to go nowhere - if it did manage more short-term gains, they didn't last long.

 

During the recent leg higher, there have been 6 distinct periods when the ratio was in extreme territory.  4 of those times, the market pretty much complied with the historical norms by going flat or giving back any short-term gains.

 

The 2 exceptions, though, were big failures.  From late July through late September last year, and late February through late March this year, the buy/sell ratio was well into extreme territory, and yet stocks powered higher almost without pause.

 

So the current extreme certainly is no 100% guarantee that stocks can't resume their momentum run.  But looking at the probabilities, that seems significantly less likely than a market that flattens out at best.

 

 

 

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Equity Market Indicators

 

Notes:

The relentless uptrend since the February bottom met with a couple of spikes in our bearish (for the market) indicators, and except for a small hiccup here and there, stocks didn't pay much mind.

 

A couple of weeks ago, we got a huge spike in the number of bearish indicators, and after a tiny hiccup, stocks went on to make another high.  It has been choppy, though, and the S&P is again under the level it was then.  With the most recent dip, the indicators have moved back to a more neutral position, but as we saw in January, there could still be something of a hangover ahead due to the recent spike in bearish indicators.

 

More history:   Short-term Score     Long-term Score    Indicators At Extremes

 

 

* New extreme

See all indicators

 

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Bonds, Commodities and Currencies - Updates and Extremes

 

Nothing notable for today.

 

 

Jason Goepfert

Founder, Sundial Capital Research, Inc.

 

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