SENTIMENT READINGS SEND UP WARNING SIGNALS
The latest sentiment readings are disturbingly bullish. The market has not been at such psychological extremes since major market tops were last put in place. The latest reading from trade-futures Daily Sentiment Index reported 88% bulls among S&P 500 traders. The last time a reading this high was reported was on October 9, 2007 – a top in the Dow.
Meanwhile, the AAII weekly reading ticked up 2 notches to 50. We haven’t seen a reading of 50 since the market peaked back in May of 2008 just after the Bear Stearns and Fed intervention rally.
Adding insult to injury is data from Bloomberg reporting that just 3% of investors are bullish on the dollar. If you’re looking for the contrarian of all contrarian bets the dollar might just be your bet. A rising dollar in this environment would surely be a brick wall in front of equity markets. Remember, investors can remain irrational longer than you can stay solvent, but the warning flags are waving. This is a game of risk management and the risk/reward of this market is currently unfavorable. I would liken the current environment to a card counter who has just been on a tear playing blackjack, but finds that the deck is currently running low on face cards. The odds now favor the house. You can stay and press your luck, but the smart move is to simply walk away from the table….
* Special thanks to reader Dean for contributing to this piece.
I am a huge believer in buying the dollar. Watch China crash on a strengthening Yuan (pegged to the dollar) and sell on the way up to the foreign capital escaping to the safe haven of the US money markets.
A lot of things around the globe have been topping out and hitting those attractive round numbers simultaneously — S&P, NASDAQ, ASX, FTSE, crude, AUD exchange rate, etc., etc. And now I see a lot of continued dancing and hesitancy of the S&P at around the 1000 mark.
I hate technical pseudo-scientific mumbo jumbo, but this does seem to be one of those testing points that will require some sort of breakthrough for it not to provoke a sell-off. (The market is larger than any of us, so I have to accept that round numbers help to rule the day.) Over the next few weeks, we may either have a nice spurt ahead of us or else see a bit of a setback. I’m starting to lean toward bearishness in the short run because retail sales data will be coming out next week that I suspect won’t look so great, but it may still be worth being long with stops just in case we get a pleasant upside surprise.
A bit related to sentiment….
Rob’s ideal world:
- Strong and stable dollar, at PPP with the EUR, YEN.
- Moderately high real interest rates. Savings rewarded, but borrowing not punished. A very gently upward sloping yield curve.
- The Fed would focus solely on price stability with an inflation target of 0%-1%. (Full employment would NOT be a Fed objective). The Treasury would focus on dollar stability.
- Stable prices (ideally 0% to 0.5% inflation)
- Slow, but steady growth, no bubbles. (No big booms, no big busts)
- Long-term thinking would replace short-term thinking
- Recessions would be minor (no bubbles) and cushioned with an expanded social safety net rather than monetary policy.
- The focus of wealth creation would shift from inventive financial engineering to creating value.
- Wall Street would focus on raising capital for new inventive enterprises rather than taking advantage of every possible arbitrage opportunity. Wall Street would be synonomous with “trust” rather than unlimited “greed”.
- A minimum down payment of 20% would be required on purchases of all real estate, government backed or not. Loan originators would be required to take initial losses on any delinquent loan. Everyone involved should have skin in the game.
- CNBC would show David Faber reports on major companies and trends. No Cramer, no Fast Money, no Squauk Box.
- Fair trade and a focus on maintaining a balance of trade would replace the free trade mantra.
- Retailers would go back to promoting made locally and made in America over “low prices always”. In general value would be promoted over low price. Advertising would focus on education as much as pure emotional promotion.
- Everyone could go about their day feeling mildly bullish about the future, with a bearish thought here or there to keep their emotions in check.
Admittedly a boring world for traders, but a dream world for the fiscally responsible. Exactly the opposite of the (manic-depressive) present reality.
Relative strength is also at an extreme level of 76.
Here is the latest bullish call:
http://www.marketwatch.com/story/goldmans-cohen-says-sp-may-hit-1100-this-year-2009-08-06
If Cohen isn’t a contrarian indicator I don’t know what is….
A flash from the past…..S&P 500 earnings were $17.02 in Q208. Abby’s 1,400 call put a 20.5 multiple on that quarter’s earnings. She is being a bit more conservative this year. Q209 earnings are now forecast at $13.82. The 1100 call is only a 19.9 multiple.
The call last year came just in time for Goldman to start selling, but last year the market was falling at the time, this year it is rising strongly.
—————
Goldman’s Cohen sees S&P 500 fair value
at 1,400
Mon Jul 14, 2008 8:39am EDT
NEW YORK, July 14 (Reuters) – The fair value of the Standard & Poor’s
500 .SPX, the broadest gauge of major U.S. stocks, is at 1,400, based on a 6
month to 12 month view, Abby Joseph Cohen, Goldman Sachs’ senior
investment strategist, said on Monday.
“Our strategy team’s sense is that in 6-12 months, fair value in the S&P 500
is on the order of 1,400,” she told CNBC television.
The S&P 500 entered a bear market last week, falling more than 20 percent
from its Oct. 9, 2007 record close of 1,565.15. On Friday the index ended at
1,239.49.
VA:F [1.5.8_856]
TPC:
I provide the following quotes and the site (at the bottom), for the purpose of raising a question to you and others.
To preface (and my working assumption): Fed purchasing of GSE paper and Treasuries provides liquidity injections to primary dealers who in turn have newly available play money used to drive up stock and commodity prices. The evidence provided in the site below shows how, as of last week, the Fed is now indirectly and in a round about way buying Treasuries, without having to do so directly through its QE program, schedule to end next month.
Now, my question: While I fully agree with your point here regarding sentiment, is it possible that this and other developments demonstrate that we live in truly ‘different’ times, and consequently scenarios that provided direction in the past, as to where the stock market is likely head . . . no longer apply?
I realize there is no definitive answer to this, but conditions certainly do require that we examine how profound developments over the last year or two place in question all assumptions that provided fruit in the past.
“Just last week, when the auction results were announced it was trumpeted to great fanfare that there was “more than sufficient” bid-to-cover, “strong demand” and all the rest.
“And now it turns out that 47% (!) of the bonds that were taken by the primary dealers in that auction have been quietly bought by the Fed and permanently secreted to its balance sheet.”
“And oh, by the way, don’t expect any stock market weakness while so many billions are being shoveled out the Fed and into the pockets of the primary dealers. They’ll have to do something with all that freshly minted cash…..”
http://www.chrismartenson.com/blog/fed-buys-last-weeks-treasury-auction/23880
TPC,
I am curious when you speak of equities and other holdings if you are only speaking of a trading account or your entire portfolio.
You sold your equities last Friday. Does that mean that you personally have no money invested in equities now or that you just sold all the equities in your trading account? No core holding in a retirement account?
negative reversals on SPX, DJI, NYA and XLF; bot some TYP@15.80; my charts are screaming danger too…
Hey Van,
Please explain what you mean by negative reversals and charts screaming danger.
Each opened up and went down but also closed a fair amount above the low of the day. There was no strong move up at the end of the day as we have seen in many recent days.
Thanks
An interesting piece from DShort on the breakout on low volume on the inverse head and shoulders. Comparison to 1932, 1974 and 2002.
http://dshort.com/articles/2009/bear-market-volume-getting-technical.html
And another piece on bear market recoveries.
http://dshort.com/articles/2009/bear-market-recovery-curve.html
And inflation adjusted prices of the S&P composite index with secular highs and lows (and where we stand today)
http://dshort.com/charts/SP-Composite-secular-bull-bear-markets.html?SP-Composite-secular-trends-with-regression
check this video out…It’s a bit dated but it explains the psychology of sentiment:
http://www.youtube.com/watch?v=Vb7XftlaPGQ
At the risk of launching a rookie question…can someone please explain the “monetization” of the debt issuance?
In a post above:”To preface (and my working assumption): Fed purchasing of GSE paper and Treasuries provides liquidity injections to primary dealers who in turn have newly available play money used to drive up stock and commodity prices. The evidence provided in the site below shows how, as of last week, the Fed is now indirectly and in a round about way buying Treasuries, without having to do so directly through its QE program, schedule to end next month.”
I understand the purchase of the Treasuries/GSE paper, but for those Primary dealers to sell they had to have bought new issuances/exchanged value ($$s) to being with, no?
Apologies for what may be an elementary question…Thanks.
Further on the topic of sentiment, ZeroHedge has a similar graph of the Credit Suisse sentiment reading as well:
http://www.zerohedge.com/sites/default/files/images/Euphora.jpg
Rob,
I wish all the politicians in Washington has your ideals and work to make it so. I know quite a few people who’s disillution and cynical about what have transpired these days including me.
Another video of Prechter from October 19, 2007. The S&P500 was trading at 1,519 at the time.
http://www.youtube.com/watch?v=SjS60TaD_J8&feature=related