Sentiment Report - January 25, 2012

Posted 01/25/12 7:25 PM ET by Jason Goepfert                Archive

 

 

Headlines

 

Smart / Dumb Money Confidence     

 

1  The market's performance continues to impress, bucking seasonal patterns and worrisome sentiment conditions.  Those conditions continue to stack up.

 

2  Last October, traders in the Rydex family of mutual funds rushed into the safety of the Money Market precisely as stocks were bottoming.  They're exhibiting the opposite behavior now.

 

3  Odd Lot trades, those orders for fewer than 100 shares, have been skewed to the sell side lately.  Oddly enough, that has been a non-contrary indicator.

 

 

 

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

Stocks were due to gap up after Apple's earnings, but dipped overnight and the broader market opened down, removing the chance for a false breakout, something that would have likely triggered at least a short-term pullback.  The current situation is very similar to one year ago, when we were in the midst of a seasonally difficult time for stocks, with troubling sentiment, but prices continue to drift higher...until all the gains were wiped out during the subsequent correction.  Until this momentum starts to crack, betting against the market is as high-risk as betting with it.  We'd use something like a two-day violation of a short-term trendline or 10-day moving average as a sign that the seasonal/sentiment worries are about to play out.

 

Bottom Line

The market is torn between good momentum and bad seasonality and indicator values (see the "Active Studies" and "Indicators At Extremes" sections 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.  We'd be more inclined to bet on a sustained pullback should the S&P 500 close below 1315.

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Today's Studies & Updates

 

     

Fleeing Safety For The Risk Of Leverage

In a Data Brief early last October, Rydex Traders Flee To Cash, we discussed how traders in the Rydex mutual fund family had exited many of the index and sector funds, and dumped their assets into the ultra-safe Money Market fund.

 

Those traders decided to panic at exactly the wrong time.

 

As stocks have rallied during the past few months, traders have been moving out of the Money Market and back into the sector and index funds.  Assets in the Money Market are now down to $873 million, about 43% of total assets.

 

At the same time, they've become quite comfortable with the index funds, particularly the leveraged ones.  There is now $275 invested in the leveraged long index funds for every $100 invested in the leveraged short index funds.  These are funds that track the S&P 500, Nasdaq 100, DJIA and Russell 2000.

 

The chart below shows the percentage of assets invested in the Money Market fund, and the Leveraged Bull/Bear Ratio since the March 2009 market bottom.  The red arrows highlight times the Money Market percentage was very low, and the Bull/Bear Ratio very high.

 

Click chart for larger view

 

Dating back to 2004 when some of the leveraged funds were introduced, there was only one other time that had a similar setup.

 

Click chart for larger view

 

The table below shows the S&P's performance going forward after each of the instances.

 

Click table for larger view

 

  continued from previous column

 

 

Oddly Enough, Odd Lot Traders = Smart Money

Odd Lot trading describes those trades executed on the NYSE for fewer than 100 shares at a time.  Generally, these are from the smallest traders in the market.

 

In October 2010, the NYSE changed the way it releases Odd Lot trading data.  It's not clear how or why they changed the data, but it was drastically different from what they had released in prior years.

 

Prior to that October, Odd Lot data was an inconsistent indicator, but could be considered a better contrary indicator than not.  In other words, when these small orders were skewed to the buy side, it typically coincided with a market top.  When these small orders were mostly sells, it indicated extreme pessimism and usually a market bottom.

 

After the NYSE changed its calculation, the interpretation of the indicator changed as well.  It doesn't work as a contrary indicator, but seems to have promise as a non-contrary one.

 

It feels weird to suggest this, but the Odd Lot traders have been the smart money.

 

A possible reason is the proliferation of algorithmic trading, where funds break up their orders into tiny bits to confuse other market participants and disguise their trading strategies.

 

Whatever the reason, the chart below shows the Odd Lot Purchase Percentage since the change in October 2010.  The indicator calculates what percentage of total orders are buy orders.  The higher the blue line, the more these small trades are made up of buy orders.

 

Click chart for larger view

 

We can see that currently, the Percentage in on the lower end of its range, meaning these small orders have been skewed towards sells instead of buys.

 

That would suggest these traders are cautious on the market, and of the six other times it's been this low, stocks dipped afterward four times.  The exceptions were in the momentum market of late 2010.

 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
01/19 Liquidity Premiums hit an extreme Medium   01/04 Upside momentum High
01/18 Nasdaq performance after Intel earnings High   12/23 Multiple follow-through days Medium
01/17 Congress in session with low ratings Medium   12/09 4th quarter gain of +10% Medium
01/13 Performance after MLK day Medium   11/11 3 months of large unfilled gaps Medium
01/10 CSFB vs. VIX divergence Medium   11/10 Very low penny stock volume Medium
01/10 OEX vs. equity options Medium   10/04 Rydex traders flee to cash High
01/09 Spike in Nasdaq / NYSE Volume Low        
01/06 Low VIX ahead of earnings Medium        
11/03 Rydex traders getting "toppy" Medium        
09/02 Low ratio of cash to equities Low        

 

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General Equity Market Indicators

See all equity indicators

 

Most of our indicator groups are showing more bearish (for the market) than bullish individual indicators.  We don't have a large number of bearish extremes, but as of January 17th we have 0% at a bullish (for the market) extreme.  That's unusual, and often precedes a market pullback...but it would be more of a probability if we had more than 30% of our indicators at a bearish extreme at the same time.

 

 

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

 

Most of the broad sectors are showing at least neutral sentiment, with a few well into overbought territory, especially a couple of previously beaten-down ones like Financials and Housing.  We typically see a pullback after those sectors reach these levels.

 

 

See this Data Brief for more background on the Sentiment Scores

 

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Currency / Commodity Sentiment

See all currency/commodity indicators

 

Traders just aren't tiring of selling the Euro, with short positions hit record highs week after week.  The Pound is nearing similarly pessimistic territory, as traders head to the US Dollar.  Despite a relentless slide to multi-year lows, sentiment towards Natural Gas has been fairly tame.  It's showing pessimism, for sure, but not the deep levels we'd expect to see after such an extended decline.

 

 

 

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