Sentiment Report - January 6, 2012

Posted 01/06/12 6:45 PM ET by Jason Goepfert                Archive





Smart / Dumb Money Confidence     


1  The gap up on Tuesday has so far been a "breakaway" with every day since having a higher low than the high on December 30th.  That usually means limited downside.  But...


2  When volatility declines to a multi-month low ahead of January earnings releases, the rest of the month has been a tough slog.


3  The latest Commitments of Traders report didn't show any large changes in sentiment.  The US Dollar is still heavily favored among speculators, while the Euro, Wheat, Silver and Cocoa are the most heavily shorted.


The Smart Money is 46% confident in a rally.

The Dumb Money is 54% confident in a rally.


Smart/Dumb Confidence

 (click chart for larger version)


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Risk Summary


Short-term Risk Level:  5     




Intermediate-term Risk Level:  5     




Bottom Line

There just isn't any good way to reconcile the fact that the momentum we've seen is a good sign for the next few weeks.  But seasonally, we've rarely seen gains when volatility dips this low in January.  So stocks continue to look good unless the S&P 500 either drops back below 1250 or heads to 1300ish with a confluence of overbought readings.  Then we'd be more inclined to bet on that seasonal correction.


Bottom Line

We're past the seasonal sweet spot for stocks, and now things become more in line with random.  There are now some initial signs of momentum, which suggest we could avoid the worst of the often-seen late-January swoon.

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Today's Studies & Updates



Breakaway Gap Continues To Hold

The gap from Tuesday is looking increasingly like a "breakaway" gap that doesn't fill very quickly.


The intraday lows of the past four days have all been above the high from December 30th.  With the S&P within spitting distance of a multi-month high, that's impressive persistence.


Out of 20 other times it has happened in the history of the S&P 500 SPDR (SPY), only 1 time did the S&P fall back enough to close the gap within the next week.  3 of them filled it within two weeks, and 4 within a month.  That means that 80% of the time, the momentum did not let up anytime soon.


Low Volatility Ahead Of January Earnings Reports

The biggest sore spot, as we've touched on almost daily, is seasonality.


There have been 10 days since 1986 when the VIX "fear gauge" dropped to at least a three-month low before earnings season kicked off in January.  Of those 10 days, 9 showed a negative return through the end of the month.  The sole gainer was +0.4%.


The 10 days were clustered among four different years, but the outcome was similar - low reward and high risk for the S&P.  The maximum gain into month-end averaged only +1.1%, while the maximum loss averaged a painful -6.8%.



continued from previous column


Payroll Beat, And Market Dip, Is No Big Deal

The S&P declining more than -0.25% on more than a 25k beat in the Payroll Report hasn't been a kiss of death.


The next day, the S&P was higher 8 out of 13 times, averaging +0.7%.  It posted basically the same performance during the whole next week.  Its returns during the next few weeks was mixed with no clear pattern.


continued in next column     


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Active Studies & Updates

See expired studies


Bearish for equities 


Bullish for equities 

Date Description Priority   Date Description Priority
01/03 Surge in call options Medium   12/23 Multiple follow-through days Medium
11/03 Rydex traders getting "toppy" Medium   12/09 4th quarter gain of +10% Medium
09/02 Low ratio of cash to equities Low   11/11 3 months of large unfilled gaps Medium
        11/10 Very low penny stock volume Medium
        10/19 Seasonality into year-end Medium
        10/04 Rydex traders flee to cash High


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General Equity Market Indicators

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The October re-test of the August low pushed the % of indicators at a bullish (for the market) extreme back above 40%, which has led to positive results going forward the vast majority of the time.  We got a positive push in stocks once again after that.  Currently, the % of Bullish and Bearish indicators are whipsawing back and forth, mirroring the volatility in stocks.



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


Indicators At Extremes

* New extreme

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Stock And Sector Sentiment

Go to sector breadth charts


Almost all sectors dipped into overbought territory in late October.  The subsequent correction gave us a mixed back, with a smattering of oversold sectors by mid-November.  Since then, we've seen a mixed bag, with mostly neutral readings and a few overbought ones.  There is no real theme among the sectors.



See this Data Brief for more background on the Sentiment Scores


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Currency / Commodity Sentiment

See all currency/commodity indicators


As the commodity continues its unrelenting slide, speculators and the public in general are piling on the short side in Cocoa, which is nearing an all-time extreme in pessimistic sentiment.  Same goes for the Euro, where speculators are flirting with an all-time high in short positions.




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