Sentiment Report - January 30, 2012

Posted 01/30/12 7:20 PM ET by Jason Goepfert                Archive





Smart / 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.






The Smart Money is 42% confident in a rally.

The Dumb Money is 67% 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:  7     




Bottom Line

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 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



January's Gain Sets Up A Good Year

We're on track to have one of the better Januarys on record, with a 4.4% gain (Tuesday will obviously impact that).


The January Barometer has been discussed quite a bit in other places, so I don't want to focus on that too much.  It's hard to ignore, though, just how much of a difference a good January has made.


The table below shows how the following days and months fared when January rose 4% or more since 1929.


The yellow-highlighted rows are presidential election years.


Click table for larger view


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.


Click chart for larger view



Spike In "Fear" Is Just An Illusion

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.

 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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