Sentiment Report - May 2, 2012

Posted 05/02/12 7:10 PM ET by Jason Goepfert           Archive




Smart / Dumb Money Confidence  


1  According to the Intermediate-term Indicator Score, sentiment has been souring as stocks have rallied modestly.  This is not a bullish sign; stocks haven't done well 1-2 months after previous instances.  More


2  According to Investor's Intelligence, 36.6% of newsletter writers are bullish but looking for a correction - neutral, in other words.  That's one of the highest levels in 20 years and has been a generally positive long-term sign for stocks.


3  Thanks to heavy trading in Intel options, the Equity Put/Call Ratio showed 75 put options traded on the CBOE for every 100 call options.  That's the 4th-highest reading since the rally began in December.  Stocks rebounded immediately after the others (1/4/12, 2/10/12 and 3/6/12).  If we don't rally this time, it will be a minor sign that the trend has changed.



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)


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Risk Summary


Short-term Risk Level:  5     





Intermediate-term Risk Level:  5     




Bottom Line

There wasn't much resolution on Wednesday as stocks continue to meander ahead of Friday's jobs report.  There was a surge in put/call ratios which has been short-term bullish, since December in particular.  We'd still tag the long side with lower risk than the short side as long as the S&P holds above 1390.  If it can't hold that area, there are a couple of worrying signs, like discussed below, that would gain more weight in our book.


Bottom Line (Last changed 5/02)

We don't have many extremes at the moment, and recent studies have been either mixed or inclusive.  One troubling sign is that sentiment has been souring as stocks have risen, and the S&P has broken up after a consolidation around its 50-day average.  More often than not, the first breakout is a "fake" move.  The uptrend in the S&P 500 is still fully intact, though, so risk doesn't appear to be too high unless it drops below 1390 initially, and 1350 in particular.


Today's Studies & Updates

Sentiment Worsens As Stocks Rise


With many stocks meandering higher, we're not seeing a lot of enthusiasm among most of our sentiment indicators.  Some of them, like the Investor's Intelligence survey, are showing more and more folks moving to the sidelines even with a steady market.  The neutral responses in that survey are nearing the highest levels of the past decade.


We can see that too in the Intermediate-term Indicator Score.  The S&P is close to a 52-week high, but the Score is near the lower end of its range and moving lower even as stocks move higher.  This means that our indicators are showing less bullishness (Chart 1).


I've argued repeatedly over the years that the theory that stocks "climb a wall of worry" is wrong-headed.  They don't do that.  Stocks rise when investors become more and more bullish, not less and less so.  Declining optimism is a bad thing for stocks, until it gets to a point where it is at an extreme level and we can reasonably expect stocks to counter-react based on historical norms.


Let's go back to 2000 and look for any other time the S&P had climbed to within 1% of a 52-week high, yet the Indicator Score was at a level of 1.1 or worse (Table 1).


We can see from the previous instances, that this wasn't a great sign for stocks.  The mediocre-to-poor sentiment readings led to a positive market over the next 2 months only 1 time out of 11 attempts (several of them were clustered together).


The worst period was during the next 30-50 days.  Before and after that, stocks were moderately weak, but not overwhelmingly so like during that window.


During the next two months, the S&P's average drawdown (maximum loss at its worst point) was -6.0%, with all but one losing at least -3.3%.  Its maximum gain averaged only +1.7%, and only one was larger than +2.5%.


The curious thing about this is that the market's performance was much better if the S&P was more than 1% below its 52-week high - in other words, if the market was correcting as sentiment was worsening.


To be honest, I'm not sure how much weight to put on this.  It has obviously been consistently negative and consistency is important, but it conflicts somewhat with a study we looked at last week (though that was longer-term in focus).  If the S&P 500 drops below 1390 it'll be more alarming and below 1350 it'll be a big red flag.  At least until the Score drops to 1.30 or more.


Click charts for larger view

Chart 1: Sentiment Isn't Rising Along With Market

Table 1: S&P Performance After Diverging Score



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   03/22 Weekly price persistency Medium
03/21 Extreme risk appetite 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        
01/25 Rydex traders exit cash, enter leverage Medium        




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


Other than the Gold Bugs, the broad sectors aren't showing much in terms of extreme sentiment.  A couple have dipped into overbought or oversold territory briefly over the past few weeks, but not for more than a few days as the market oscillates.  Looking at traders in the Rydex family of mutual funds, there has been a jump in interest in Biotechnology, which hasn't ended well lately.



See this Data Brief for more background on the Sentiment Scores




Currency / Commodity Sentiment                                See all currency/commodity indicators


The recent rebound in Natural Gas has led to a sharp uptick in optimism from all-time lows in Public Opinion.  We've seen this story before, with the rallies lasting another few weeks, then petering out once sentiment gets even modestly too optimistic.  Orange Juice, on the other hand, is seeing the 2nd-lowest opinion readings since 2003.  We're also seeing a quick reduction in bullish sentiment in some of the medals, especially Platinum Opinion and speculator positions in Coffee remain near all-time lows.






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