Morning Report for Thursday, September 1, 2011
Previous Report    Print    Archive                                                 Posted 09/01/11 2:00 AM ET by Jason Goepfert

 

 

Top Stories In Sentiment

 

Smart / Dumb Money Confidence

 

Stocks managed to climb for a fourth day, but buyers seemed to be getting a little tired compared to the other days.  The short-term price pattern in most indexes is now modestly bearish, though seasonality is positive for the next two days.

 

The IPO market in August saw a rare development - many more offerings that were postponed versus priced.  There have only been a handful of months that can claim such a feat, and only two since the bursting of the internet bubble in 2000 (and that was near the end of the 2008 bear market).

 

Newsletter writers got less bullish last week in spite of a large rally in stocks.  That's unusual, and has come near some major market turning points but we're not reading a whole lot into the numbers.

 

 

Risk Level: 1 (Extremely Low)

 

The Smart Money is 58% confident in a rally.

The Dumb Money is 38% confident in a rally.

 

Smart/Dumb Confidence

 (click chart for larger version)

 

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Short-term Outlook (1-5 Days)

 

 

Risk Level:  6

 

 

Summary:  Buyers' conviction in pushing prices higher seems to be ebbing a bit, as stocks weren't able to hold the day's gains very well.

 

As noted yesterday, for the past 8 years it has been very unusual to see much selling pressure at all in the days before the Labor Day holiday, so perhaps that seasonal influence will allow stocks to continue to levitate for a bit longer.

 

Usually though, the extreme overbought readings like we've seen in the Short-term Indicator Score tend to take their toll and lead us into a pullback within a week or so.

 

It would be odd - and bullish for the next few weeks - if stocks managed to buck that tendency and show positive returns during the next week, especially following the holiday.

 

The price pattern the S&P has carved out is fairly bearish - a gap up, close below the open at a multi-week high while under the 200-day moving average.  Combined with the recent overbought conditions, it's a solid argument to expect a pullback.

 

Again, the biggest immediate obstacle to that is seasonality, both prior to Labor Day and the beginning-of-month effect.  Seasonality isn't usually enough to trump the other factors, so the risk seems more tilted to the downside at this point.

 

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Intermediate-term Outlook (1-3 Months)

 

Risk Level:  1 

 

 

Summary:  On August 22nd, we summarized the positives and negatives that had occurred during the month.

 

The positives were mostly sentiment- and breadth-related.  Basically, what we'd seen was on a par with past market crashes, and the major stock averages were following through in classic fashion with a bottoming process.

 

The negatives were technical, most troubling of which was the precarious nature of the market's overall trend.  We've been very close to tipping into a bear market, and depending on how you define it could very well already be mired in one.

 

The S&P 500 has now declined for four straight months, at least -1% each month, with the last month at least -4% and the worst loss of the four.

 

There were 6 other times this happened since 1929, all of them in July, August or September.  Here's how the S&P fared over the next 6 months:

 

9/30/46:  +1.4%

8/31/66:  +12.6%

7/31/74:  -2.9%

8/30/74:  +13.1%

9/30/74:  +31.2%

9/28/01:  +10.2%

 

That's mostly good, but in '74 there was a nasty shorter-term decline before a lasting rally.

 

Most of what we looked at in August suggested a 1-3 month rally was most likely.  There was potential for a longer-term bottom, but with the dubious market trend we're less confident in such a long time frame for a rally.  It's possible, just not as high a probability as the shorter-term rally was that we discussed earlier in August.

 

Late in the month, most of the major stock averages managed to rally above their prior post-crash highs, which is decent confirmation that we've endured the worst of the selling pressure for now.  We're likely to see a short-term pullback, but expect that the August lows will hold for awhile longer.

 

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Charts & Studies

 

Chart:  IPO Withdrawals

 

On August 12th, we took a look at the market for Initial Public Offerings and saw that if the IPO market continued to freeze up, we'd be seeing a rare display of timidity among investment bankers.

 

The month didn't get any better for Wall Street.  According to Bloomberg data, only 5 IPOs were priced in August, while 16 of them were postponed or withdrawn.  That's the 2nd-highest number of delayed IPOs in the past decade (only December 2008 was higher with 17, and October 2004 was close with 15). 

 

 

That still pales to the spike we saw during the bust of the internet bubble in 2000, which was extraordinary in many ways for the IPO market.

 

The difference between the number of priced versus postponed IPOs dropped to -11, one of only a handful of months in the past 13 years we've seen a negative number, much less a number worse than -10.  Only a several-month stretch in 2001 matched exceeded -10, along with October and December 2008.

 

This tends to be a better contrary indicator than anything, which would suggest a positive for the market at this point, but the sample size is small.

 

 

Chart:  Investor's Intelligence Sentiment Survey

 

According to Investor's Intelligence, newsletter writers became a little bit more bearish last week despite a large rally in stocks.

 

 

I don't want to make too much out of this - it's only one week, after all - but it's an unusual occurrence so we should at least look at it.

 

There have been a few other times since 1969 that something similar occurred.  What we're looking for is any other time the S&P rallied at least +4% during a week, but the sentiment survey lost at least 2% in the Bull Ratio, and was lower than 55%.

 

 

Shorter-term results seemed to suggest that the newsletters were justified in showing some caution.  Several times, the market fell heavily in the weeks following these readings.

 

Longer-term (more than three months), it was a different story.  A few of them were close to major market lows, and all but one showed positive returns from 3 months to 1 year forward.  A year later, in fact, 5 of the 7 showed returns greater than +20%.

 

I wouldn't take this as a buy signal necessarily, but again it's unusual and we received some questions about it, so it was worth a look.

 

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General Equity Market Indicators

 

On August 8th, we registered so many extremes among our indicators that the percentage of those in bullish (for the market) territory very nearly reached 50%.  That is a level that has been rarely breached, especially lately.  The last time was November 20, 2008.  Stocks have traditionally done very well over the next 1-3 months when the percentage gets this high.

 

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

 

Indicators At Extremes

 

Bearish for equities  Bullish for equities 

 

Put/Call Ratio - OEX Options Only

Up Volume Ratio - NYSE

Down Pressure - NDX

TRIN - NYSE

Down Pressure - S&P

VIX

VXN

NYSE Available Cash

 

 

ISE Sentiment Index

Put/Call Ratio - OEX Determination Index

Rydex Bear Fund Asset Flow

Rydex Bull Fund Asset Flow

Rydex Ratio

NH/NL - NASDAQ

Put/Call Ratio - Total of Moving Averages

ROBO Put/Call Ratio

Rydex % of Sectors w/Assets > 50 Day Avg

Fidelity Sector Breath

InsiderScore.com Buy/Sell Ratio

Insider Insights Buy/Sell Ratio

OTC Volume

Sentiment Survey - Investor's Intelligence

Sentiment Survey - Market Vane

Sentiment Survey - Consensus, Inc.

Sentiment Survey - Hulbert

AIM Model

AMG Mutual Fund Flows

Dumb Money Confidence

Intermediate-term Indicator Score

 

* New extreme

See all equity indicators

 

 

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Sector Sentiment

 

The pullback at the end of July served to push most market sectors lower, with several into oversold territory.  The mini-crash on August 3rd shoved every sector into deep oversold territory, with not even the defensive sectors spared.  We can't recall another time in the past decade where all sectors were this far into oversold territory.  Only the defensive Staples and Utilities sectors have been able to escape from deep oversold territory since then.

 

 

See sector breadth charts

 

 

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Currency / Commodity Sentiment

 

Public Opinion on many commodities turned quickly once we saw some selling pressure.  Contracts like Orange Juice and the Swiss Franc saw abrupt turn-arounds in Opinion, and are no longer showing extreme optimism.  Overall there aren't really any that are showing extreme pessimism, and the Yen is the most-loved among all the contracts.

 

 

See all currency/commodity indicators

 

 

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