Sentiment Report - May 4, 2012

Posted 05/04/12 9:15 PM ET by Jason Goepfert           Archive




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


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 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:  4     





Intermediate-term Risk Level:  5     




Bottom Line

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.


Click charts 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   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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