Sentiment Report - January 31, 2012

Posted 01/31/12 7:20 PM ET by Jason Goepfert                Archive





Smart / Dumb Money Confidence     


1  For the first time in history, the S&P 500 never suffered any more than 0.6% drop during the entire month of January.  Looking at other months, that probably doesn't mean as much as the fact that it rallied so much.


2  Volume in exchange-traded funds that profit on a market decline has dropped off a cliff, and is now on a par with times the market has run into a tough spot.


3  Traders in the Rydex family of mutual funds have rushed into the riskiest funds offered, pushing the Beta Chase Index to a rare height.


4  The Baltic Dry Index is dropping, and loan standards are tightening.  That gives us a -2 on a very simplistic economic model.


5  The latest Public Opinion data show that traders have started to pull back on their long US Dollar bets as the buck pulls back.  They've started to ease back into many commodities, none moreso than Cattle.


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)


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:  7     




Bottom Line

For a variety of reasons (see below, and the "Active Studies" list), there has been a setup for a pullback in stocks - based on precedent, something on the order of 2-4 weeks and 3%-8%.  Momentum appears to be weakening a bit, and the S&P 500 has - barely - closed below potential support at 1315 for two days in a row.  The pattern is messy, but we're still looking for that correction.


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).  Momentum has ruled, with a historic run during January.  The S&P has now closed below potential support at 1315 for two days in a row, so we're assuming that the seasonal and sentiment worries outlined over the past couple of weeks will now become more of a force.

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Today's Studies & Updates



Traders Are Beta Chasin'

A few days ago, we looked at the increase in aggressiveness among traders in the Rydex family of mutual funds.  Yesterday, they stepped it up even more, as we can see from the Rydex Beta Chase Index.


Click chart for larger view


The Index level of 7.2 means that those traders are 7 times more likely to trade a "risky" fund than a "safe" fund within that mutual fund family.


That's a level of speculation we've seen a handful of other times since the bull market began, and it usually led to a quick retreat or at least a temporary flattening out of the price rise.


The Market Never Drops...Why Hedge?

Overall volume on the major exchanges has been low, and that's especially true among many of the exchange-traded funds that profit on a market decline.


The S&P 500 went the entire month of January without a meaningful drop, so traders are not seeing much point in hedging against seeing one anytime soon.


The chart below shows the volume in inverse ETFs.  We can see that the other times this hedging volume was so low, stocks got hit soon afterward.  Even if we compare this volume against total composite NYSE volume, it's almost exactly the same picture.


Click chart for larger view



An Economic Warning Sign

Today, the Federal Reserve released its survey of senior loan officers.  This is outside our normal focus, but it brought to mind a report from a couple of years ago.


At the time, we looked at a simple economic timing system that used the quarter-over-quarter changes in the Baltic Dry Index and the survey of senior loan officers.




  continued from previous column


When shipping rates were heading higher and loan officers were loosening their credit standards, stocks tended to do extremely well going forward.  The data has been mostly mixed since then, but now it is decidedly negative.


Click chart for larger view


While there are structural reasons for the drop in the Baltic Dry Index, and it hasn't been a consistent predictor on its own, that index has clearly dropped over the past quarter.  And over the past quarter, loan officers tightened their credit standards.  As we outlined in that comment from 2009, stocks tended to under-perform in the months following that kind of combination.


The January That Wouldn't Quit

Shaking off a number of consistent seasonal and sentiment influences, the S&P 500 managed to get through the entire month of January without a single-day loss of more than -0.6%.


That's never happened before, at least since 1928.


It has happened 20 times when looking at the other 11 months of the year.  The vast majority of them occurred in August (8), December (6) and March (3).  There were only 3 other occurrences spread across the other nine months.  It didn't seem to have any predictive power.


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
01/25 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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