Sentiment Report - January 13, 2012

Posted 01/13/12 6:45 PM ET by Jason Goepfert                Archive

 

 

Headlines

 

Smart / Dumb Money Confidence     

 

1  The Intermediate-term Indicator Score has moved to its most-optimistic position in over a year.  Usually that means trouble for stocks.

 

2  Stocks tend to dip around this time of year, especially technology.  This isn't anything we haven't discussed before, but we show a table showing the performance of various sectors this time of year.

 

3  There was no major changes in the latest weekly Commitments of Traders report.  Speculators continue to pile into Euro short positions.  While not quite as extreme, they're also hovering near record shorts in the Peso and Wheat.

 

 

 

The Smart Money is 42% confident in a rally.

The Dumb Money is 63% confident in a rally.

 

Smart/Dumb Confidence

 (click chart for larger version)

 

Quick Links

Risk Summary  |  Today's Updates  Equity Indicators

Stocks and Sectors  |  Commodities  |  Comments 

 


Risk Summary

 

Short-term Risk Level:  6     

 

 

 

Intermediate-term Risk Level:  6     

 

 

     

Bottom Line

While stocks saw their largest intraday dip in a month on Friday, buyers stepped in yet again.  Seasonality is negative for next week (and beyond for technology stocks), and sentiment is getting troublesome on a multi-week basis.  A close below 1280 on the S&P 500 would be a definite cause for concern because of it.

 

Bottom Line

The market is torn between good momentum and some questionable seasonality and indicator values (see the "Active Studies" below).  The momentum rules for now, and until price shows some signs of cracking, the negative signs will just be a heads-up and not necessarily cause for action.  That may change as early as next week.

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Today's Studies & Updates

 

     

Indicator Score Gets Stretched

This week, we've discussed a few of the indicators that have flipped into bearish territory for the market.  Nasdaq vs. NYSE volume, OEX vs. Equity option trading, and some others are suggesting downside for stocks.

 

These indicators have helped to push the Intermediate-term Indicator Score to its worst level since last December.  There are usually three different times we see an extreme like this:

 

1.  During a vicious bear-market rally

2.  During the momentum stage of a bull market

3.  Everything else

 

When we get this kind of extreme under condition #1, the typical result is a nearly immediate correction.  Under condition #3, we see perhaps another 1-3 weeks of modest rallying before prices give back all those gains and more.

 

When it occurs during #2, there's really no telling how far the market will go.  The two most notable instances of this were in October 2006 and December 2010, when stocks continued to plow higher for a couple of months.

 

So where are we now?  Well, in Oct '06 and Dec '10, the S&P 500 was trading at multi-year highs in addition to showing signs of momentum.  Currently, we're not at new highs, but we have seen some signs of momentum, like the unfilled gaps.

 

Given the seasonality we're heading into, though, it seems unlikely that we'll have a complete failure to see a pullback or at least a consolidation.

 

Click chart for larger view

 

continued from previous column

 

Most Sectors Weaken Around This Time

We've looked at seasonality, and know that it tends to be weak starting...well, now.  Starting around the 2nd week in January, stocks have had a consistent tendency to weaken.  Or at least not show much strength.  Especially technology.

 

I don't want to hammer on this too much.  Seasonality is a tertiary indicator at best, and can easily be overwhelmed by fundamental developments, technical breakouts and changes in sentiment.

 

Anyway, the table below shows the performance of various sectors since the day honoring Martin Luther King, Jr. became an exchange holiday in 1998.  The 2nd row, showing the performance of QQQ, is highlighted as it was the most extreme.  It was positive only 1 out of 11 years into the end of the month.

 

Click table for larger view

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
01/10 CSFB vs. VIX divergence Medium   01/04 Upside momentum High
01/10 OEX vs. equity options Medium   12/23 Multiple follow-through days Medium
01/09 Spike in Nasdaq / NYSE Volume Low   12/09 4th quarter gain of +10% Medium
01/06 Low VIX ahead of earnings Medium   11/11 3 months of large unfilled gaps Medium
11/03 Rydex traders getting "toppy" Medium   11/10 Very low penny stock volume Medium
09/02 Low ratio of cash to equities Low   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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