Posted 01/30/12 7:20 PM ET by Jason Goepfert
/ Dumb Money Confidence
1 Despite some
early nervousness, many stocks closed nearly unchanged on Monday. Our
sentiment guides were similarly limp on the day.
2 January is
poised to put in one of its better performances this year. That has led to
a positive return during the next 3 months 20 out of 23 times, and all but once
in the past 70 years. This positive start led to better-than-average
performance across all time frames.
3 The VIX "fear
gauge" rose an inordinate amount on Monday given the small losses in most
stocks. That's largely impacted by the day of the week, though, and there
is no evidence it's a sign of irrational fear among traders.
For a variety of reasons (see the "Active Studies"
list below), there has been a setup for a pullback in stocks - based on
precedent, something on the order of 2-4 weeks and 3%-8%. But buyers have
refused to budge so far, and so we wait until the risk/reward appears to turn
more favorable for long positions, or we get some kind of break in price.
We 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
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
The numbers, especially the longer out we look,
were quite good. That's particularly true when compared to those years
when January showed less than a 4% gain.
Three months after the good Januarys, the S&P had
tacked on an additional +4.2%, with positive returns an impressive 87% of the
time. That compares to an average +0.5% return and 58% chance of being positive
after the not-so-good Januarys.
The disparity was also very wide after 6 months
and into year-end, but the widest chasm between the haves and have-nots was the
next 3 months.
continued from previous column
Out of the four times it occurred during a
presidential election year, the S&P had two losses and two gains for every time
frame up to six months later, then was positive all four times after that.
The chart below shows those four occurrences, and
how the market played out during the rest of the year.
Speaking of 4%, the VIX "fear gauge" was up more
than 4% on Monday despite a very minor loss in the S&P 500.
Since 1990, there have been 697 days with losses
of 0.25% or less in the S&P. Of those 697 days, only 105 of them showed a
gain in the VIX of more than +4%.
The VIX has a definite day-of-the-week pattern,
though. Of those 105 days, nearly half (54 days) occurred on a Monday.
Only 12 of them were on a Friday.
As for the ones that occurred on Monday, there was
no particular bias in stocks in the ensuing days. The market went up and
down perfectly in line with any other random time. It was not a consistent
predictor of irrational fear among options traders.
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.
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.
Data Brief for more background on the Sentiment Scores
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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