Morning Report for Friday, September 2, 2011
Previous Report    Print    Archive                                                 Posted 09/02/11 12:45 AM ET by Jason Goepfert



Top Stories In Sentiment


Smart / Dumb Money Confidence


The lack of enthusiasm from buyers on Wednesday flow into Thursday's session, and it was enough to push our more sensitive guides back to neutral territory.


Active investment managers have been "not bullish" for the past couple of weeks, maintaining net long exposure of less than 22%.  This week, they remain subdued and have high confidence in that outlook.  It's probably a positive for the market, but precedents are too few for a solid conclusion.


On a long-term time frame, a troubling development is that equity funds and ETFs now have about triple the assets of money market funds.  This ratio has been a decent gauge at highlighting times of long-term risk and opportunity over the past 15 years.



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:  5



Summary:  Stocks spiked higher in the early going Thursday after a rare positive surprise from an economic release, but the enthusiasm faded as the day wore on.


That helps to confirm what we discussed yesterday - buyers just seemed to have been getting tired, at least according to the price patterns heading into the day.


Seasonally, the day before the Labor Day holiday has had a slight positive bias during the past 20 or so years, but nothing too overwhelming.


The biggest focus will be the Payroll Report.  Economists have been lowering their estimates for that release during the past couple of days, so a low number may already be somewhat built in.


For what it's worth, there have been 8 times in the past 15 years that the Payroll Report fell on the day before the Labor Day break.  5 of the 8 closed in positive territory, averaging +0.6%.


The day after the holiday was also positive 5 out of 8 times, and so was the next week.  So overall a mostly neutral bias.


Most of our shorter-term indicators are back to neutral territory, and we have the big unknown in the Payroll Report, so there isn't much edge heading into Friday from what we follow.  That may change with a big reaction on a surprise Payroll number as we head into next week.


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Intermediate-term Outlook (1-3 Months)


Risk Level:  1 



Summary:  No change in outlook from Sept. 1st.


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Charts & Studies


Chart:  NAAIM Survey Of Manager Sentiment


With tales of retail investors pulling out of the market, we may be in a period where prices are pushed around by computers on one hand, and professionals on the other.


We can't judge the sentiment of high-frequency traders very well, and it wouldn't really matter if we could since they change every couple of milliseconds.  But professionals are another matter, and it's a reason I like the weekly survey from the National Association of Active Investment Managers.


For the latest week, managers upped their long exposure a bit, from just over 20% to just over 22%.  That's still quite low historically.  What's also interesting is that as a group, their confidence in being "not bullish" skyrocketed to 67%.


We compute their aggregate confidence by looking at the standard deviation among responses.  The lower the standard deviation, the higher the degree of confidence among the managers in their net exposure.


This is only the third distinct time they've had less than 25% net long exposure to stocks, and more than 50% confidence in that stance.



It's hard to garner a conclusion from the two precedents.  One was just as the survey began in mid-July 2006, and the other was an extended period during the depths of the 2008/2009 crisis.


Generally, when the exposure of these managers reaches an extreme - especially if there's also a high confidence level at the time - it's a decent contrary indicator.  The current net long exposure of 22% is low, extreme even, but I'd prefer to see something closer to 15% - 20% before becoming too interested in this as a slam-dunk bullish signal for stocks.



Chart:  Ratio Of Assets In Equities Versus Money Market Accounts


The latest release from the Investment Company Institute showed that mutual funds in the U.S. were holding only 3.3% of their assets in liquid investments.  That's a new all-time low, dating back to 1954.


We've discussed this many times over the years.  My contention has been, and continues to be, that we're going to see a new, lower range for this figure than we've seen historically.  But still, when funds are holding barely 3% of their assets in cash, it doesn't leave a whole lot of wiggle room to meet redemptions without selling some stocks, which can feed on itself during a decline.  Perhaps we got a taste of that in August.


What's also troubling is that the data shows there is $6.7 trillion invested in equity mutual funds and exchange-traded funds (including broad-based, sector-based and international).  But there is only $2.3 trillion invested in cash-like money market funds.


The ratio of assets in equities versus cash comes out to 2.98.  Over the past 15 years or so, the ratio has been roughly bounded by 1.5 on the lower end and 3.0 on the upper end.



We're butting up against that upper end now.  The last time it reached this height was in February 2005, and stocks did very well for the next couple of years...before unraveling all of those gains during the subsequent bear market.


And the last "buy" signal when it dipped below 1.5 in October 2008 was early as well, and led to some initial losses before more than making up for it.


This is obviously not a precise timing mechanism.  But it does provide some big-picture context, and by the looks of it, that context isn't very encouraging.  One possible caveat here is that folks could be pulling money out of money market funds due to exceptionally low interest rates, and parking the cash elsewhere.  Unless that "elsewhere" is dividend-paying stocks, this ratio could be a bit misleading and not quite as negative as it appears.


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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 


Rydex Bull/Bear RSI Spread

Up Issues Ratio - NYSE

Up Issues Ratio - NASDAQ

Up Volume Ratio - NASDAQ

Daily Cumulative Tick - NYSE

Put/Call Ratio - OEX Options Only

Up Volume Ratio - NYSE




NYSE Available Cash



ISE Sentiment Index

Put/Call Ratio - OEX Determination Index

Rydex Bear Fund Asset Flow

Rydex Bull Fund Asset Flow

Rydex Ratio

Put/Call Ratio - Total of Moving Averages

ROBO Put/Call Ratio

Rydex % of Sectors w/Assets > 50 Day Avg

Fidelity Sector Breath 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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