Posted 01/31/12 7:20 PM ET by Jason Goepfert
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/ 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.
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.
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.
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.
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.
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.
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.
See
this
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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