Sentiment Report - April 19, 2012

Posted 04/19/12 7:10 PM ET by Jason Goepfert           Archive

 

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Headlines

 

Smart / Dumb Money Confidence  

 

1  The neutral camp is getting crowded among sentiment surveys.  Combined non-committal responses among newsletter writers and individual investors have soared to nearly the highest in a decade.  More

 

2  Corporate insider buying took a turn for the better last week, triggering a buy signal among small cap stocks from institutional research firm InsiderScore.com.  More

 

 

 

 

The Smart Money is 46% confident in a rally.

The Dumb Money is 54% 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:  5     

 

 

     

Bottom Line

Stocks have struggled since hitting some short-term extremes on Tuesday.  The S&P remains in a tight range from the past 7 sessions, and most of our sensitive indicators are neutral.  On the Nasdaq 100, we do have a few oversold signals and the STEM.MR Model for that index is now oversold.  Since December, the index has rallied from similar conditions almost without fail.  If it doesn't rally soon, and especially if it drops below 2670 as well, it will send a strong signal of weakness.  That means being cautious about buying too soon and being more inclined to sell into short-term rallies.

 

Bottom Line (Last changed 4/10)

We'd been looking for a correction for awhile without any evidence of one occurring anytime soon.  There was a definite conflict between extreme momentum (positive) and extreme sentiment (negative).  The typical reaction is a choppy market, with a correction usually limited to 3%-8% and 2-4 weeks.  If it ended now, it would be shallow and short, so we do expect more selling...but probably not before a short-term rally attempt.

 

Today's Studies & Updates
     

The "Neutral" Camp Gets Even More Popular

 

The latest survey of individual investors from AAII showed another increase in neutral responses - those with no particular directional bias for stocks over the next six months.

 

That goes hand-in-hand with an increase in neutral responses from newsletter writers in the Investor's Intelligence survey.

 

When we combine the two, we can clearly see that currently there are a lot of noncommittal folks out there.

 

Such a spike in uncertainty seems out of place given that the S&P 500 was recently sitting at a 52-week high.  In fact, over the past 25 years, that has been unusual.  There has been a combined 65% or greater percentage of neutral responses in those two surveys when the S&P had hit a 52-week sometime in the past month on 28 separate occassions.

 

The second chart shows how the S&P 500 performed over the next 52 weeks after those 28 occurrences.  In the top pane, the blue line shows the percentage of time the S&P was positive, and the gray line is the "control" - how the S&P performed after any recent 52-week high (not just the ones with high neutral responses).

 

The bottom pane is basically the same thing, but shows the S&P's average return instead of the percentage of time it was positive.

 

The index tended to under-perform random during the first six months or so.  After 17 weeks, for example, the S&P was positive 54% of the time compared to 76% of the time after a random 52-week high.  Its average return was also well below average.

 

After that, it was mostly in line with random, even out-performing a bit longer-term.  Its best performance was 37 weeks later when it was positive 95% of the time with an average return of +10.5%, both above-average.

 

Overall, there doesn't appear to be anything too compelling about the surge in neutral responses.  It would be better for the market if investors continued to step in instead of step away, however.

 

 

Click charts for larger view



Insiders At Small Cap Firms Start To Step Up

 

The latest report about corporate insider activity from InsiderScore.com showed another uptick in buying versus selling activity in the broader market, pushing the Buy/Sell Ratio into positive-for-the-market territory.  A caveat is that volume is low due to corporate "quiet windows" during earnings season.

 

Among the broad indices, there was a surprisingly bullish "inflection point" among small-cap stocks:

"An Industry Buy Inflection, our strongest quantitative signal of positive sentiment, was triggered in the Russell 2000 last week as buyers outnumbered sellers for the first time since the final week of November 2011. It was the first time an Industry Buy Inflection was triggered since August 2011, when insiders bought at their most aggressive pace since the multi-year market bottom of March 2009. Qualitatively the activity within the Russell 2000 is similar to what we witnessed in June 2011 when an Industry Buy Inflection was also triggered."

The table to the right shows how the Russell 2000 performed after previous buy inflection points since 2004, the earliest for which we have data.  In deference to InsiderScore, we're not listing the actual dates but rather just the month of the inflection.

 

Across all time frames but the shortest-term, small-cap stocks out-performed a random return by nearly double, and was positive significantly more often.  There were a few nasty declines in there, though, lessening the itch to consider this an automatic positive for the market.

 

Click table for larger view

 

Active Studies & Updates                                                                     See expired studies

 

Bearish for equities 

 

 

Bullish for equities 

Date Description Priority   Date Description Priority
04/04 S&P overvalued according to strategists Medium   04/09 VIX up 7 days in a row Medium
04/02 Wall St more bearish than Main St Medium   04/09 Oversold McClellan Oscillator Medium
03/21 Extreme risk appetite Medium   03/22 Weekly price persistency Medium
03/01 An extended trend Medium   03/19 5 closes 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

 

Prior to the last year, we saw the percentage of bearish (for the market) indicators reach 40% several times.  In the past year, it hasn't gotten much higher than 30%, each time coinciding with a period when equities were about to flatten out for 1-3 weeks.  We saw that again on March 20th as that percentage reached 29% and stocks have consequently backed off a bit.

 

 

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 the first time in months, we have more than a few broad sectors in oversold territory.  There is a mix among them, from basic materials to energy to technology.  That suggests the selloff has touched a wide cross-section of stocks, which is confirmed by very weak overall breadth readings.  We don't have a huge confluence of oversold signals among sentiment indicators, but we do among the breadth indicators.

 

 

See this Data Brief for more background on the Sentiment Scores

 

 

 

Currency / Commodity Sentiment                                See all currency/commodity indicators

 

The correction in gold has been accompanied by a quick change in sentiment.  Newsletter writers were recommending a large net short position for one of the few times in the past 10 years, and speculators have started to really reduce their long positions.  Energy remains speculators' main focus, with positions in crude oil, heating oil and unleaded gas hovering near multi-year or all-time record highs.

 

 

 

 

 

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