Sentiment Report - March 21, 2012

Posted 03/21/12 7:10 PM ET by Jason Goepfert           Archive

 

 

Headlines

 

Smart / Dumb Money Confidence  

 

1  A couple of quiet days haven't left us much in terms of new sentiment developments.  Our indicators are mostly just treading water near their recent levels.

 

2  A composite gauge of brokerage firms' estimates of investors' risk appetites is showing one of the lowest levels of risk-aversion in the past 15 years.  That hasn't necessarily been a problem until risk starts to become more of a focus.

 

 

 

 

The Smart Money is 33% 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:  7     

 

 

     

Bottom Line

Another modest day means that once again there isn't much of new to report.  We're still stuck in one of those extremely difficult environments where momentum has been strong (and tends to continue), while sentiment extremes (like the Smart Money / Dumb Money Spread) argue for a choppy market at best.  There is simply no edge apparent within our niche at the moment.

 

Bottom Line

There's a reason we usually look for at least two consecutive closes below support before ramping up expectations of a pullback, and this has been one of them.  The S&P dipped below 1350, then popped right back above.  We had been looking for a 2-4 week correction due to the Active Studies (see below) and it looked like we were on the verge of one, then buyers returned and we're right back at new highs.  Risk still looks elevated for both longs and shorts, but clearly the momentum we're seeing is a positive and helps quell some of the negatives we had been discussing.

 

Today's Studies & Updates
     

A Hungry Risk Appetite

 

As various concepts become popular, we often see brokerage firms hop on board and come out with products they can sell to capitalize on the trends.

 

We're seeing that in spades with volatility products.  Somewhat related are "risk appetite" indicators, and a handful of firms have introduced different such measures, which tend to look at market behavior like credit spreads, equity and foreign exchange volatility, gold prices and sector relative performance (such as between defensive sectors like utilities and economically sensitive sectors like financials).

 

We combined three of them and normalized them into a single index.  The chart shown to the right is a 21-day moving average of that index.

 

They include:

  • Citigroup Macro Risk Index

  • Westpac Risk Aversion Index

  • UBS G10 Carry Risk Index Plus

As the index rises, it means that investors are becoming more and more risk-averse.  An index reading of 1.0 would mean that they are the most risk-averse possible.

 

As the index falls, investors are seeking more and more risk.  An index reading of 0 would mean that everyone has gone hog-wild and thrown caution to the wind.

 

The 21-day moving average just dipped below 0.2, one of the more risk-seeking levels we've seen since 1997.  A shorter-term average, say over the past 5 days, would be at 0.1 and approaching the lowest levels in the past 15 years.

 

Low index levels, meaning very high risk tolerance, isn't an automatically contrarian sell signal for equities.  But when we hit a low level and reverse back up (the red arrows on the chart), stocks tended to struggle.  Conversely, periods of very high risk aversion that then started to reverse (the green arrows) were decent intermediate-term buy signals.

 

This serves as confirmation to the Smart Money and Dumb Money Confidence that we're at an extreme of risk-seeking behavior.  These can stretch out for some time, as we've already seen, but that doesn't lessen the risk of a sudden reversal.

 

Click charts for larger view

     
   

 

 

Active Studies & Updates                                                                     See expired studies

 

Bearish for equities 

 

 

Bullish for equities 

Date Description Priority   Date Description Priority
03/01 An extended trend Medium   03/19 5 close above Bollinger Band Medium
02/27 McClellan Oscillator divergence High   12/09 4th quarter gain of +10% Medium
02/17 "Black swan" indicators rise Medium   11/11 3 months of large unfilled gaps Medium
02/06 Surge in junk debt issuance Medium        
02/03 Equity Hedging Index gets extreme Medium        
01/31 Extremely low inverse ETF volume Medium        
01/25 Rydex traders exit cash, enter leverage Medium        
01/10 OEX vs. equity options Medium        
01/09 Spike in Nasdaq / NYSE Volume Low        
09/02 Low ratio of cash to equities Low        

 

 

 

General Equity Market Indicators                                                    See all equity indicators

 

Several times since mid-January, we've seen the number of bearish (for the market) indicators jump close to or above 30% of our total indicators.  That's a decent sign of increased risk for a market decline, though in the past that figure has soared above 40% or even higher.  Now that we've finally seen something of a break from the relentless uptrend that started 2012, the Indicators At Extremes is back to giving more normal readings.

 

 

More history:    Short-term Score      Long-term Score     Indicators At Extremes

 

Indicators At Extremes

* New extreme

 

Stock And Sector Sentiment                                                        Go to sector breadth charts

 

For much of the time from mid-January through mid-February, many of the sectors were in overbought territory.  Several of them started to slip, reflecting the poor breadth that accompanied the latest push to new highs in the broader equity indexes.  Now that "the market" has taken a breather, we're seeing some of those sectors already starting to head towards oversold.

 

 

See this Data Brief for more background on the Sentiment Scores

 

 

 

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.

 

 

 

 

 

Member Comments

 

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