Posted 05/04/12 9:15 PM ET by Jason Goepfert
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Smart
/ Dumb Money Confidence
1
Futures traders upped their exposure to stocks
significantly in the past week. "Smart money" hedgers, who take the
opposite position, obviously then increased their shorts in the
S&P 500 and
Dow in particular. An all-index composite of hedger activity shows the
larget net short position since 2008.More
»
2 It's been
tough for the market to recover from a poor reaction to a jobs report.
When the S&P 500 lost more than -1% on those days, over the next 2 days it
rebounded only 39% of the time (11 out of 28) and sported an average return of
-0.4%.
The market looked OK on a short-term time frame as
long as the S&P could hold above 1390, but a move below there raises risk quite
a bit. The only mitigating factor is a jump in very short-term pessimism,
which often leads to a bounce. If the S&P had stayed above 1390, the risk
level would be significantly lower, but losing that important area makes the
sentiment extreme less reliable. If we have another bad day on Monday and
a move towards support around 1350, then risk of a further short-term decline
should lessen significantly.
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
A Troubling Jump In
Smart Money Shorts
Commercial hedgers in the futures market
are those large traders who use the futures to hedge their day-to-day
business activities. Speculators, both large and small, are the
ones on the other side of their trades.
In the week through Tuesday, those "smart
money" hedgers increased their net short position in the S&P 500, Nasdaq
100, DJIA and Russell 2000 by a large margin. They are now net
short to the largest degree since the late fall of 2008.
This data doesn't have a perfect record,
but historically the market has done much better when hedgers are at the
higher end of their net long position than when they are very net short.
We can see that last fall as the market
corrected, hedgers quickly and massively built up long positions, then
gradually sold those down as the market rallied. That's what they
almost always do. They hadn't made much of a move in the past
couple of months...until this week. That's not a positive sign for
stocks.
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.
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
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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