Morning Report - June 9, 2011

Morning Report for Thursday, June 9, 2011

Archive Posted 06/09/11 3:25 AM ET by Jason Goepfert

Top Stories In Sentiment		Smart / Dumb Money Confidence
Stocks just can't get out of their own way, stretching the S&P's losing streak to 6 straight days and potentially 6 straight weeks. That's a rare kind of selling pressure, and it has triggered a fairly large number of extremes among our indicators. One of those extremes is the Bull Ratio from the AAII survey of individual investors. It has dived to a very low level, which we don't often see when the S&P is so near a 52-week high. Investors' pessimism towards the next six months was rarely rewarded.		Risk Level: 1 (Very Low) The Smart Money is 63% confident in a rally. The Dumb Money is 38% confident in a rally. (click chart for larger version)

Short-term Outlook (1-5 Days)

Active Studies:

See a list of retired studies

Risk Level: 3

Summary: So much for the Wednesday bounce. The S&P finally broke its streak of rebounding on Wednesday when it had been down so many consecutive days heading into it.

This kind of weakness, when the market doesn't respond to oversold conditions or other consistent tendencies, is obviously not a positive sign. We like when the market does what it's "supposed" to do, and this ain't it.

Traders and investors are getting the hint. Individual investors are abandoning stocks in a hurry, as the AAII sentiment survey shows in its most recent update (see below).

Options traders on the CBOE nearly traded as many put options as call options on Wednesday, which is highly abnormal during a bull market environment.

In fact, there have only been 7 other instances dating back to 1997. The S&P was within a week of a major short- to intermediate-term bounce each time (8/21/98, 10/8/98, 4/15/05, 8/14/07, 8/15/07, 8/16/07 and 1/15/08).

Unlike the day before, yesterday's session triggered a large number of new extremes among our indicators, and more than 20% of them are now oversold. That ties with March 16th of this year, but it's still below the 30% area that we reached a few other times in the past 2 years.

The spread between the Smart Money / Dumb Money Confidence is now at +25% for only the 2nd time since the March 2009 bottom (late May 2010 was the other instance). During a bull market, a spread this wide led to positive 3-month returns 84% of the time.

Extreme can always get more extreme, of course, but we're quickly reaching a point where the market should put in a short- to intermediate-term low within 3-5 days at most.

For the short-term, same as before...as long as we're under 1300ish, and well above 1250, we're in a kind of no-man's land in technical terms, so there isn't a very clear spot to measure risk. If taking new long positions for a trade, I would be placing a 1% or so stop loss, as most rebounds in the studies have germinated without losing more than that.

Intermediate-term Outlook (1-3 Months)

Risk Level: 1

Summary: No change from June 7th.

Active Studies:

05/19: Newsletter bulls drop, market rises Positive

05/18: Flailing earnings surprises Negative

05/13: An 8-week low in AAII bulls Positive

05/11: A new all-time high in breadth Positive

05/09: S&P's weekly price pattern Negative

05/09: Increase in speculator positions Negative

05/03: Jump in Rydex trader optimism Negative

04/07: Surge in OEX put open interest Negative

04/06: Near 20-year low in newsletter bears Negative

03/31: Rapid whipsaw in 10-day Up Issues Positive

03/22: Breadth thrust buy signal Positive

03/21: Mini-panic selling washout Positive

02/01: Low mutual fund cash levels Negative

10/14: Fed POMO activity Positive

See a list of retired studies

Charts & Studies

Chart: AAII Bull Ratio

Individual investors continue to abandon the market at a rapid clip.

The latest evidence comes from the American Association of Individual Investors (AAII), whose survey shows only 24% of respondents expecting a higher stock market over the next six months.

Among those expressing an opinion, the Bull Ratio dipped below 34% for the first time since last August, and for only the fourth time since the 2009 market bottom. The six-month forward returns in the S&P 500 after those instances were +20.4%, +11.4%, +23.9% and +29.3% (the dates were (7/2/09, 10/30/09, 7/2/10 and 8/20/10).

The chart below shows that indicator over the past decade, with the arrows highlighting times it dropped that low with the S&P within 7% of a 52-week high at the time.

Going back to the survey's inception in July 1987, the table below highlights every instance when the Bull Ratio dropped below 34% and the S&P was within 7% of a 52-week high. The returns are taken as of Wednesday closes (that's when the survey stops taking responses).

The shorter-term returns were OK - better than random - but the most appropriate column to look at is the six-month returns. Those are the ones the individuals were asked about.

Out of the 24 weeks that qualified for the study, only 2 of them sported a negative six-month return. The median drawdown (i.e. maximum loss) during the next six months was only -1.0%, compared to a median maximum gain of +8.8%, so a big positive skew in terms of risk/reward.

The only real failure was in early 1990 as the economy was just entering the first recession in 8 years.

General Equity Market Indicators

In mid-March, for the first time since September 2010, we had more bullish (for the market) than bearish indicators. The market quickly took off to the upside, reversing the position of our indicators, so as of the end of April we once again had 0% bullish indicators. That's not normally a good sign, and the market sold off since. As of June 9th, more than 20% were bullish (for the market), similar to March, so we'll see if we get a similar response. Historically, more than 30% would be considered extreme.

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

Indicators At Extremes

Bearish for equities	Bullish for equities
* Put/Call - OEX Open Interest Ratio NYSE Available Cash	* Rydex Beta Chase Index * Up Volume Ratio - NYSE * CSFB Frear Barometer * Put/Call - Equity Options Only * Put/Call - Equity Moving Averages * Put/Call - Equity De-Trended * Put/Call - Total of All Options * Put/Call - Total Moving Averages * ISE Sentiment Index Rydex Bull/Bear RSI Spread Down Pressure - NDX Down Pressure - S&P Daily Cumulative Tick - NASDAQ TRIN - NYSE Sentiment Survey - AAII Smart Money Confidence Dumb Money Confidence
* New extreme See all equity indicators

Sector Sentiment

The most recent pullback has hit some of the most economically sensitive sectors hard, such as Energy, Financials and Industrials. The more defensive sectors, however, have held up well and are actually close to or in overbought territory, especially Health Care and Utilities.

See sector breadth charts

Currency / Commodity Sentiment

There has been a big change in sentiment over the past few weeks, as many commodities suffered their largest losses in months. That has apparently scared off some of the recent momentum money, as we've seen a dramatic scattering of bulls in silver, the currencies (ex-Dollar) and many of the softs as well. Amazingly, another couple weeks of this and it's possible we'll be seeing some extreme pessimism in these measures.

See all currency/commodity indicators

Member Comments

Please observe a proper level of civility when posting comments. The point here is to foster intelligent discussions to help everyone learn. Abusive posts will be deleted, at our sole discretion.

Comments powered by Disqus

Subscriber home page

NOTICE: Forwarding or other distribution of this report is prohibited without the express permission of Sundial Capital Research, Inc. If you do not possess a firm-wide license, then forwarding this message will violate your subscription agreement.

sentimenTrader.com is a trademark of Sundial Capital Research, Inc.

Sundial Capital Research, Inc. 12527 Central Avenue NE, Suite 165 Blaine, MN 55434