Posted 03/01/12 7:15 PM ET by Jason Goepfert
/ Dumb Money Confidence
1The S&P has nearly gone 50
days without closing below its 20-day average, and 35 positive closes out of
those 50 days. Those are similar 3 other periods since the bear market
2Individual investors upped
bond exposure in February to one of the highest levels on record. It
has not been an effective indicator for bond prices, but the S&P 500 was higher
10 out of 11 times 3, 6 and 12 months after a bond allocation above 22.5%.
Buyers continue to buy every tiny dip in the
market, taking us on one of the most persistent streaks of the bull market.
The other 3 times we've seen this long of a trend since 2009, it was about to
end. There are other risks as well
(see the Active Studies below). But again, given the bucking off of so many
formerly reliable patterns, we wouldn't bet on an imminent decline as long as the S&P
levitates above 1350ish.
For weeks, there has been no change here...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.
From a number of different perspectives,
the market environment we're in now is remarkable.
At various points in the past six weeks,
the broader market has shrugged off bouts of extreme sentiment, negative
seasonality, egregiously negative breadth divergences and a host of
negative price patterns.
This stretch is similar to several others
we've seen since the 2009 bear market low.
If we levitate again tomorrow, then the
S&P 500 will have enjoyed 50 consecutive days without closing below its
20-day moving average.
In April 2010 the streak lasted 49
In November 2010 the streak lasted
In January/February 2011 the streak
lasted 40 days, but there was only 1 close below the 20-day.
Ignoring that, the streak lasted 57 days.
So we're bumping up against the max number
of days buyers were able to sustain the streak.
In addition, as of Tuesday the S&P had
managed to eek out 35 positive closes during the past 50 days. The
index also reached 35 positive out of 50 trading days on 01/11/10,
4/19/10 and 2/10/11, indicated by the red arrows in the chart to the
The last two also coincided with long
streaks above the 20-day average as noted above. All three of them
saw the market top out almost immediately.
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.
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.
Data Brief for more background on the Sentiment Scores
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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