Posted 02/06/12 7:15 PM ET by Jason Goepfert
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1 Issuance of
high-yield debt has surged to a new record high. That's probably not a
good sign.
2 We looked at
volume in inverse exchange-traded funds
last week.On Monday, overall
volume was low, but inverse ETF volume was pathetic. It came in at 16.5
million shares, which has been exceeded on the downside only 4 other times
during the past four years. 3 of the 4 were during year-end holiday
periods. The other was 4/25/11, which happened to be a few days before the
2011 market peak.
3 We can't show
it until Friday, but the Hulbert Nasdaq Newsletter Sentiment was 75% net long
again this week. The 3-week average is now 75%. That's the highest
average over a 3-week period since July 14, 2000.
Same as Friday...Performance after gaps up to new
highs on Payroll Report days is very poor during the next 2-3 days, so again we
see risk of a pullback as being high. The risk of a meaningful (3%-8%) correction has
been high for the past few weeks, but it's simply been wrong to bet on it.
It looked like a better bet when the S&P closed - barely - below 1315 for two
days in a row, but again that was wrong as it jumped right back above and is now
challenging its 2011 highs.
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 had
closed below potential support at 1315 for two days in a row, then popped back
above, so again it's too early to expect an imminent correction until we drop
back below or go on to greater sentiment extremes.
According to
news reports, last week saw the highest issuance of high yield debt
since May 2011. There are two things interesting about that:
1) high yield is just a nice name for "junk", and 2) May 2011 was very
near the peak of the equity market.
According to Bloomberg data and
using an estimate of debt issued on Monday, the 5-day average of new
junk debt has reached $19 billion, a new all-time record.
The chart below shows that 5-day average.
Going back further than 2009 distorts the scale since the past few years
have seen more issuance than any other year - by far - since at least
1999.
Here, we can see a better comparison. The
current value of $40 billion is on a par with the highest one-month averages
we've ever seen.
The other times we've seen it this high were April
2010, October 2010, February 2011 and May 2011. Other than the momentum
market in the fall of 2010, the market took a hit afterward.
It worked well the other way, too. When the
monthly issuance dropped below $5 billion in June 2010, August/September 2011
and again at the beginning of this year, stocks did well going forward.
It could be argued that because issuance was so
low earlier this year and is now back to the other extreme, the current scenario
is more similar to October 2010 than the other two instances.
Also, there could be some seasonal influences that
are skewing the current data, and it's hard to blame companies for coming to
market when yields are so low and investors are scrambling for every bit they
can get, as an
article in today's WSJ made clear.
Even so, when companies can place so much risky
debt due to market demand, it has generally been a sign that things may have
gotten a bit too frothy.
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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