I’ve noticed a remarkable trend over the course of the last few years – the financial blogosphere has been consistently bearish and the comments within many of these blogs is even more bearish than its author(s).  Wondering if this could be turned into an economic indicator, I collected some data from sites that I judge to be fairly even keel in terms of their market outlook (no fear mongering blogs and no Abbey Joseph Cohen blogs need apply).  The process was very straight forward: bullish stories divided by bearish stories on a weekly basis.

I ran the data over the course of the incredible March 2009 rally.  Not surprisingly, the results speak for themselves.  The sites I sampled (which will remain anonymous for obvious reasons) have been overwhelmingly bearish throughout the entirety of the rally with the exception of one period – January 2010 – just before the market experienced its largest downturn of the rally.

Not exactly the most scientific of indicators, but I’ll update it from time to time just to see if the inverse correlation to the market is maintained. Who knows?  This might actually be a viable long-term sentiment indicator….

There was very little change this week in the S&P 500’s commitment of traders report.   Small speculators reduced their short positions marginally, but remain heavily net short.  As a contrarian indicator this report continues to spell potentially bad news for the bears.  The small speculators have missed the entirety of the March 2009 rally as institutions have increased their bullish positions.  We continue to see small speculators on the other side of this trade.

By Decision Point:

Looking at the S&P 500, a new Thrust/Trend buy signal was generated on Monday, changing from a neutral stance. Specifically, the signal was generated by the PMO (Price Momentum Oscillator) and PBI (Percent Buy Index) crossing up through their EMAs. The Thrust Component signal was confirmed later this week when the upside 20/50-EMA crossover occurred.

The Dow generated a buy the previous trading day, and we are now left with only the Nasdaq 100 still on neutral, needing a PBI crossover to occur. As you can see, this will most certainly happen by today’s market close. Note that the 20/50-EMA crossover has already taken place.

Bottom Line: Most of the indexes and sectors we track are generating buy signals after having been in neutral for about six weeks of market correction and rebound.

Understanding that we are in a deflationary environment (see here) doesn’t necessarily mean you have to buy up canned goods, guns, gold bars and search out for a good bunker.  There are ways to protect yourself and even benefit in such an environment.  In his strategy note this afternoon, David Rosenberg brings us his 5 ways to protect ones portfolio in a deflationary environment:

Source: Gluskin Sheff

The latest data from Robert Shiller’s 10 year PE ratio shows the market currently at a 20.64 multiple.  In his morning note, David Rosenberg noted that this is 26% higher than the long-run average:

“If there was an impediment, in addition to a murky economic outlook, it is valuation. There were revisions to the Shiller valuation data and the latest reading on the normalized real P/E multiple is at 20.64x, up from the 20.0x in February and 20.5x in January. The long-run trend is at 16.36x, suggesting that the S&P is currently overvalued by 26%.”

This chart provides little of utility in and of itself, but combined with a longer-term look at stock prices it raises some interesting thoughts.  As a student of and believer of mean reversion, I just can’t help but wonder if the recent recovery in stocks is nothing more than a brief respite in the long-term “chop” that has become a defining characteristic of equity prices over the last 10 years.

Source: Chartoftheday, Shiller Econ & Gluskin Sheff

Short sellers haven’t been able to catch a break in this market.  While institutions continue to allocate capital to equities (see here), small speculators continue to bet against the market.  Over the last few weeks the shorts have dug their heels in.  As the market turned lower small speculators have become increasingly net short.  According to the CFTC’s Commitment of Traders report small speculators in the S&P 500 have now reached their largest net short position of 2010 and their largest short position since early December of 2009.  These traders have been on the wrong side of the trade since the very beginning of the rally and this data could be further contrarian evidence that supports a bullish outlook for the markets.

Today’s Chart of the Day comes to us courtesy of chartoftheday.com.  Taking the long-term perspective, you just have to wonder if the market isn’t in the same process it was in the mid-70’s when the sideways to down churn ultimately resulted in a downside overshoot that ended in the early 80’s.

For some long-term perspective, today’s chart illustrates the Dow adjusted for inflation since 1925. There are several points of interest. For one, when adjusted for inflation, the bear market that concluded in the early 1980s was almost as severe as the one that concluded in the early 1930s. Also, the inflation-adjusted Dow is a little more than double where it was at its 1929 peak and trades 54% above its 1966 peak – not that spectacular of a performance considering the time frames involved. It is also interesting to note that the Dow is up 57% from its March 9, 2009 low which is actually slightly more than what the inflation-adjusted Dow gained from its 1966 peak to today.

Rail traffic was mixed this week as the Chinese New Year skewed some of the data according to the AAR.  Carloads fell 1.6% year over year and were down 15.3% versus 2008.  Intermodal traffic jumped 19% , but was down 11.1% versus 2008.  The year over year data was skewed by a sharp jump in container volume due to the week of the Chinese New Year.  As a result container volume rose 25% year over year.

The breadth of the data was slightly improved over last week.  The AAR reports:

The decline in total weekly carload volume was largely caused by a 16,828-carload drop in coal loadings. Twelve of the 19 carload freight commodity groups actually were up in comparison with the same week last year. Double-digit increases were reported in loadings of metals (44.6 percent), motor vehicles and equipment (30.5 percent), grain (21.9 percent), metallic ores (17.6 percent), grain mill products (14.4 percent) and chemicals (13.7 percent).

In this morning’s note to clients David Rosenberg points out that home prices are beginning to roll over again, despite what the mainstream media reports.  The weakness in today’s new homes sales shows that Rosenberg is on to something here.  The housing market is much weaker than most would have you believe:

“The Case-Shiller home price index was reported to have risen in December by
0.3% MoM for both the 10 and 20-city measures.  But this only occurred after
seasonal adjustment was applied to the data — the raw numbers actually show
that both house price measures fell 0.2% on the month.

Now, December does tend to be a slow month for the housing sector for obvious reasons, but there were plenty of times before the housing bubble burst that prices rose in December: 2005, 2004, 2003, and 2002; not to mention 1999, 1998 and 1997.  However, the experience of the past three Decembers as the bubble kept bursting, was awful — unheard-of declines of over 2% in 2007 and 2008 and it is this most recent performance that influences the current seasonal-adjustment process the most.

So, it could well be that the +0.5% boost to the monthly data from the seasonal adjustment factor (going from  -0.2% on the raw data to +0.3% on the seasonally-smoothed number) could be a tad aggressive.  (Also keep in mind that the massive pipeline in foreclosed properties that are sitting in shadow inventory is having a skewing effect because the shift in the mix away from foreclosed homes does tend to push up average prices, which, by the way, is why cities like L.A., Phoenix and San Diego posted the largest price gains in December.)”

Source: Gluskin Sheff

China’s Shanghai Composite has served as a relatively reliable leading indicator over the course of the last 3 years.  As we all know, China has quickly become the engine of global growth.  While most developed markets continue to struggle in the early recovery phase officials in China are working to wrangle in the already overheating economy.  Equity investors have taken notice and pared back their exposure to risky assets since late last Summer when the Shanghai had rallied over 105% from the lows.

While the S&P 500 has rallied over 6% since the recent lows the higher beta Shanghai has only managed a 3% move from the bottom.  Despite a holiday last week, Chinese investors were none to enthused with the prospect of what had occurred during the down week.  The Chinese equity market has made a series of lower lows since the Summer and remains in bear market territory by technical standards.  The Shanghai served as an important leading indicator when the bear began in 2007 and also served as a warning sign that the global economy had bottomed in late 2008 – moving several months in advance of the S&P 500.  Is this another warning sign or is China just taking a breather?