Sentiment Report - February 23, 2012

Posted 02/23/12 7:00 PM ET by Jason Goepfert                Archive





Smart / Dumb Money Confidence     


1  Strategists on Wall Street stayed relatively bullish throughout the correction last year.  Now, as stocks rally near or over previous highs, they're pulling back on their recommended allocation to equities.  Just like in 2010.


2  The buy/sell ratio among corporate insiders worsened a bit more this week, but as we discussed last week that hasn't been a sign of an imminent market peak.


3  Active investment managers continue to add to their already-high net long exposure.  Confidence is also high, but the intensity (the difference between the most-net-long and most-net-short managers) dropped.  At prior market peaks we saw average exposure, intensity and (usually) confidence all at an extreme level.


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)


Quick Links

Risk Summary  |  Today's Updates  Equity Indicators

Stocks and Sectors  |  Commodities  |  Comments 


Risk Summary


Short-term Risk Level:  5     




Intermediate-term Risk Level:  8     




Bottom Line

After what is normally a bearish price pattern on Friday and again on Tuesday, it looked like the worries in the Active Studies box below were about to come to fruition.  'Twas not to be, at least not yet, as stocks recovered yet again from early weakness on Thursday.  This remains a market that refuses to follow traditional patterns for now.


Bottom Line

Stocks have been driven by impressive momentum, and recently we've discussed that such streaks usually bode well long-term.  More immediately, though, disturbing extremes in sentiment and a major reversal in the market's premier stock, Apple, bode ill.  Risk is high for a looming correction, most likely 2-4 weeks and 3%-8% in duration.

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Today's Studies & Updates



Strategists Pull Back As Stocks Don't


For over a month, we've looked at various measures of sentiment, the vast majority of which were showing excessive optimism from one group or another.


Obviously, that hasn't impacted equities' performance so far.


One unusual outlier is the most recent recommended equity allocation among Wall Street Strategists.  It's a little over a week old, but even so strategists lowered their recommended allocation to 57% of a portfolio, from over 60% a few weeks earlier.


That allocation is the lowest since December 2009 when the S&P 500 was trading at 1105, and other than the bear-to-bull market transition period from December 2008 through December 2009, it's the lowest since 1998.


There isn't always a clear pattern to when and how much strategists alter their equity allocation recommendations.  Sometimes they ramp up exposure as stocks decline, other times as they rally.


What is striking about the current recommendation is how similar it is to late 2010.


At that point, stocks were recovering from the summer correction.  As they were challenging their previous highs, strategists really started backing off equities.


Same thing this time.  They recommended a steady hand during the correction late last year, now they're pulling back as stocks challenge their previous highs.


This is a big "if", but if stocks follow through on that pattern, then a breakout to new highs will be least for awhile.



Click chart for larger view


Click chart for larger view


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Active Studies & Updates

See expired studies


Bearish for equities 


Bullish for equities 

Date Description Priority   Date Description Priority
02/06 Surge in junk debt issuance Medium   01/04 Upside momentum High
02/03 Equity Hedging Index gets extreme Medium   12/23 Multiple follow-through days Medium
01/31 Extremely low inverse ETF volume Medium   12/09 4th quarter gain of +10% Medium
01/25 Rydex traders exit cash, enter leverage Medium   11/11 3 months of large unfilled gaps Medium
01/25 Odd Lot buyers pull back Low   11/10 Very low penny stock volume Medium
01/19 Liquidity Premiums hit an extreme Medium   10/04 Rydex traders flee to cash High
01/18 Nasdaq performance after Intel earnings High        
01/17 Congress in session with low ratings Medium        
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        
09/02 Low ratio of cash to equities Low        


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General Equity Market Indicators

See all equity indicators


With very few of our indicators at a bullish (for the market) extreme, even none of them at some points, when we see the percentage of bearish indicators go over 30% of the total, it tends to precede market pullbacks.  That happened on January 20th and again February 3rd, but so far stocks have reacted much.  A couple of times in 2010, we saw the bearish indicators jump above 40% before a correction set in, so that's a possibility here, but we would still consider risk to be fairly high.



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


The rally over the past several weeks has been concentrated in some of the more speculative sectors, such as Financials, Technology and Housing, while defensive sectors like consumer staples and Utilities haven't participated as much.  This isn't necessarily a bag thing, but when those speculative sectors get so overbought, the broader market generally takes a multi-week breather, or at the least price gains tend to moderate and flatten out.



See this Data Brief for more background on the Sentiment Scores


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Currency / Commodity Sentiment

See all currency/commodity indicators


With the correction from extremes in many currencies over the past couple of weeks, sentiment towards the US Dollar has become less enthusiastic, which is normal.  Traders have moved more into the Aussie Dollar.  We're also seeing some extremes in the energy contracts, particularly Unleaded Gas and Heating Oil.




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Member Comments


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