Sentiment Report - February 6, 2012

Posted 02/06/12 7:15 PM ET by Jason Goepfert                Archive





Smart / Dumb Money Confidence     


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.


The Smart Money is 38% 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:  6     




Intermediate-term Risk Level:  7     




Bottom Line

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.

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Today's Studies & Updates



A Binge In Junk Debt

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.


Click chart for larger view


The 5-day average is noisy, so let's pull back a bit and use the 21-day average.


Click chart for larger view


  continued from previous column


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.


 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
01/31 Extremely low inverse ETF volume Medium   01/04 Upside momentum High
01/25 Rydex traders exit cash, enter leverage Medium   12/23 Multiple follow-through days Medium
01/25 Odd Lot buyers pull back Low   12/09 4th quarter gain of +10% Medium
01/19 Liquidity Premiums hit an extreme Medium   11/11 3 months of large unfilled gaps Medium
01/18 Nasdaq performance after Intel earnings High   11/10 Very low penny stock volume Medium
01/17 Congress in session with low ratings Medium   10/04 Rydex traders flee to cash High
01/13 Performance after MLK day Medium        
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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