Sentiment Report - January 9, 2012

Posted 01/09/12 7:30 PM ET by Jason Goepfert                Archive





Smart / Dumb Money Confidence     


1  The S&P 500 futures have closed within 0.1% of the previous day for four straight days.  That has only happened one other time since 1982.  This kind of go-nowhere activity does not generate sentiment extremes.


2  With volume low, it's easier to see distortions, and we're seeing one now with turnover on the Nasdaq exchange more than 2.5 times heavier than on the NYSE.  That has usually been a negative sign of excessive speculation.


3  Stocks often struggle during earnings season in January (unlike October).  Ironically, the market does worse when it rises on the first day of season than when it declines.


The Smart Money is 42% confident in a rally.

The Dumb Money is 58% 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:  6     




Bottom Line

A nearly historically tight range over the past four days isn't conducive to triggering sentiment extremes.  So the song remains the same for now - stocks 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 a seasonal correction.


Bottom Line

We're past the seasonal sweet spot for stocks, and now things become a bit rocky.  We do have some good signs of positive momentum, but sentiment is turning optimistic.  Combine that with the seasonality, and stocks look worse than if the momentum were occurring under different circumstances.

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Today's Studies & Updates



Nasdaq Relative Volume Surges

Volume will probably pick up as earnings reports start to roll out, but for now it remains depressed.


That makes it easier to see distortions, and we're getting one of those now, as turnover on the Nasdaq exchange has been 2.5 times greater than that on the NYSE for the past two days.


The traditional interpretation is that Nasdaq stocks are speculative compared to the more staid stocks listed on the NYSE, so when Nasdaq volume is high compared to NYSE volume, it's a sign that traders are overly frothy.


Click chart for larger view


This is a minor indicator, but it still has a decent track record.  And as we can see from the chart, when the ratio has been this stretched, stocks have usually struggled.


First Day Of Earnings Season

Today marks the first day of earnings season.  We looked at individual stocks' Sentiment Scores in a Data Brief earlier this afternoon for those companies reporting during the next four weeks.


As happens every quarter, people try to extrapolate what happens on the first day to the rest of the season.  We've looked at this many times before, but...


When the S&P 500 declined the day after earnings season begins, then the rest of the reason showed a positive return 59% of the time, averaging +1.2%.  Its risk (i.e. maximum loss) averaged -3.1% while its reward (i.e. maximum gain) averaged +3.3%.


When the S&P rose on the first day, then the rest of the season was positive only 38% of the time, averaging -0.7%.  Its risk averaged -4.5% while its reward averaged +2.2%, less than half the average risk.


So stocks actually performed better the rest of the season when it declined the first day, at least since 1998 when we have a more accurate accounting of when earning season began and ended.


Whatever happens on the first day, the earnings reports that start in January have led to a down market more often than not since 1998, which is no surprise given the other seasonality stats we've discussed.



The earnings reports that begin in July have led to even worse performance, while the October releases have led to the best.



continued from previous column


A Very (Very Very Very) Tight Range

The S&P 500 futures have now closed the past four days with the following returns:  +0.07%, +0.01%, +0.09% and +0.08%, according to Bloomberg.


That's remarkable.  Since 1982, there was only one other time they managed to go four days with no more than a +/- 0.1% change.  That was 9/28/05, after which the market popped higher over the next few days, then dropped.


If we widen the range to +/- 0.25%, then there were 70 days that match.  Market performance during the next 3-5 days was slightly weak, with just-barely negative returns and a probability of being positive of 48%.  Longer-term than that, returns were in line with random.


2011 - NOT A Tight Range

My pal Tony Dwyer, Chief Equity Strategist at Collins Stewart, had asked if there was a good way to show the "all or nothing" environment we experienced in 2011.


One of the better reflections of that is the number of 90% volume days we saw.  These are days where almost all volume flowed either into "up" stocks or "down" stocks each day.


In 2011, we had 44 of those days.  Dating back to 1940, the only other year that exceeded 2011's total was 1946, which had 46.  Breadth was extremely volatile in the 40s, though, and since then there hadn't been a year with more than 35 all-or-nothing days.  That year was 2008.


There was a high negative correlation between the number of these days and that year's return in the S&P.  In other words, the more lopsided days we saw, the lower the S&P's return.


There was a very slight positive correlation for the next year, which would be a positive for 2012.  As we've discussed often, there are structural reasons like high-frequency trading that are influencing the breadth readings, so we may not be able to read a whole lot into that.

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

See all equity indicators


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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