Sentiment Report - January 26, 2012

Posted 01/26/12 6:45 PM ET by Jason Goepfert                Archive





Smart / Dumb Money Confidence     


1  Buyers are showing some initial signs of exhaustion.  When we see one-day reversal patterns like Thursday, we typically get a few more days of weakness.


2  Individual investors have been very "not bearish" for the past month, pushing the 4-week average of the Bull Ratio to rare heights.  Market performance going forward has usually been lackluster after similar extremes.


3  Despite extremes among many of our indicators, there are still some holdouts.  Active investment managers are not aggressively buying into the rally, and corporate insider activity is showing no particular bias (partly due to the quiet period during earnings season).




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)


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Risk Summary


Short-term Risk Level:  5     




Intermediate-term Risk Level:  6     




Bottom Line

When the S&P has gapped open above the previous day's high, at a six-month extreme, then reverses to close lower, the next 3 days were positive only 3 of 11 times, averaging -1.1%.  All three gainers were less than +0.8%.  One-day patterns are not consistently predictive of longer-term market peaks, however, so 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



Four Weeks Without Pessimism

Three weeks ago, we looked at the big drop in bearishness from individual investors in the AAII sentiment survey.  The single-week reading was extremely low, but that hadn't been much of a contrary indicator in the past.


That bearishness has stayed low for the past month, pushing the 4-week average of the Bull Ratio to an extreme level.


The first chart below shows every similar extreme from the survey's inception in 1987 through 1999.  It signaled right before the '87 crash, but other than that there wasn't a bear market, and the extremes didn't lead to much other than a flattening out of the uptrend.


Click chart for larger view


The second chart shows signals from 1999 through now.  Most of them again led to a flattening out of the uptrend at best, except for the 2003 instances when we were first emerging from the previous bear market.


Click chart for larger view


  continued from previous column


Something notable about our current situation is that the S&P 500 is not sitting at a 52-week high.  That has made a difference.


Here's how the S&P performed over the next 2 months when the 4-week Bull Ratio reached this kind of extreme, broken down by whether the S&P was at a high or not:


The S&P was at a 52-week high (11 instances):

Average return:  +2.1%

Average worst loss:  -1.1%

Average best gain:  +2.5%


The S&P was not at a 52-week high (12 instances:

Average return:  -1.6%

Average worst loss:  -3.8%

Average best gain:  +0.9%

There was a stark difference in performance.  When the S&P hadn't yet moved up to a new high, it showed a positive return only 4 of the 12 times, with a nearly 4-to-1 risk-to-reward ratio during the next couple of months.

 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
01/25 Rydex traders exit cash, enter leverage Medium   01/04 Upside momentum High
01/25 Odd Lot buyers pull back Low   12/23 Multiple follow-through days Medium
01/19 Liquidity Premiums hit an extreme Medium   12/09 4th quarter gain of +10% Medium
01/18 Nasdaq performance after Intel earnings High   11/11 3 months of large unfilled gaps Medium
01/17 Congress in session with low ratings Medium   11/10 Very low penny stock volume Medium
01/13 Performance after MLK day Medium   10/04 Rydex traders flee to cash High
01/10 CSFB vs. VIX divergence Medium        
01/10 OEX vs. equity options Medium        
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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