Sentiment Report - May 7, 2012

Posted 05/07/12 7:55 PM ET by Jason Goepfert           Archive




Smart / Dumb Money Confidence  


1  Speculative trading volume in the Over The Counter market increased in terms of total dollar amount.  Compared to volume in the Nasdaq Composite, this speculative volume is now near its highest levels of the past decade.  More


According to the latest Hulbert Financial Digest survey of newsletter positions, those writers who are focused on the Nasdaq decreased their net exposure to 0% in the latest week.  That's the lowest since the beginning of January.  It would have to drop to a -40% net short position or more to be considered truly extreme, however.



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

In Friday's report we noted that losing 1390 on the S&P 500 raised the risk short-term, but if we neared 1350 with a bad day on Monday, the risk of a further decline should drop significantly.  The futures dropped to that area and rebounded smartly, confirming the importance of holding that general area.  We didn't get much in terms of additional sentiment extremes since the selling occurred overnight.


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

Speculative Dollar Volume Nears Decade High


Each month, the Nasdaq exchange reports on trading activity in the most speculative sector of the market, for stocks that trade Over The Counter (also known as "pink sheets" or penny stocks).


In April, there was a slight dip in activity in terms of share volume and the number of transactions, but the actual dollar volume of stocks traded increased by 11%.  For stocks in the Nasdaq Composite index, though, dollar volume decreased by 8%.


As we often do, let's look at the ratio of speculative OTC volume to less-speculative Nasdaq Composite volume, in terms of actual dollars traded.


For April, speculative volume was about 1.2% that of the Composite.  That doesn't sound like much, but it's close to challenging the decade-high of 1.4% that we saw in February of last year.


It's always good to get a longer-term perspective, so the second chart shows the data zoomed out the furthest we can go, to 1995.  Now it doesn't look quite so ominous, as speculative volume was consistently above the current level of 1.2% without much of an impact on stocks.  It wasn't until the percentage hit 2% or so that we saw the uptrend take a breather.


Also making the data less worrisome is that overall share volume and the number of transactions both decreased in April from March, so it's not like there was this huge rush into "lottery ticket" stocks.  We'd consider the dollar volume ratio to be a minor negative for stocks given the behavior over the last decade, but with a low priority level.


Click charts for larger view



Active Studies & Updates                                                                     See expired studies


Bearish for equities 



Bullish for equities 

Date Description Priority   Date Description Priority
05/07 Speculative volume nears decade high Low   04/09 VIX up 7 days in a row Medium
05/04 A jump in "smart money" hedging Low   03/22 Weekly price persistency Medium
05/02 Indicator Score drops as stocks rise Medium   11/11 3 months of large unfilled gaps Medium
04/04 S&P overvalued according to strategists Medium        
04/02 Wall St more bearish than Main St Medium        
03/21 Extreme risk appetite 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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