With the S&P 500 posting its first weekly decline in 2012, it is a perfect time to review our blog poll on where the index will trade first: 1,300 or 1,400?
As we can see from the chart above, almost two thirds of all who voted favour the S&P 500 to close at 1,300 first, while just a little more than one third think 1,400 will be taken out first. Let us compare that to investor sentiment survey polls, usually viewed as dumb money:
- Individual investors (blue), tracked by the American Association of Individual Investors, this week reached 52% bulls and 20% bears, for a spread of over 30%. The chart above shows that those figures put us in 1.5 standard deviations above mean and slight short term extreme.
- Advisors (red), tracked by the Investor Intelligence, showed a reading of 52% bulls as well, while bears registered a 29% reading. The spread between two camps is therefore not as extreme as we see with the more volatile AAII readings.
- Active managers, tracked by National Association of Active Investment Managers, showed on average a 73% net long exposure on the US equities. We are now reaching 1.5 standard deviations above mean into slight show term extreme readings and are more than doubling last quarters average reading of 31% net long exposure.
- Finally futures traders are once again returning to optimism majority, tracked by Daily Sentiment Index and shown in the chart above. We currently have 72% bulls on Nasdaq Composite, so while not extremely bullish, it could be used as a sign of concern or a potential correction in coming days or weeks.
Summary
It seems that majority of the readers / voters of this blog stand against the majority of retail investors, newsletter advisors, futures traders and active fund managers. Contrarians all around, I guess. As I always say, you're either a contrarian or a victim!
My view remains bullish on risk assets in coming months of 2012. Having said that, I still remain neutral on equities, while very bullish on commodities due to the secular nature of the trends. Sticking to the topic of S&P 500, and looking at the chart above, I would have to fall into the 1,300 first camp. In all due respect, a correction to 1,300 would be decently healthy for the current uptrend, as we have a bullish trend line supporting prices there.
nice update as always Tiho
ReplyDeleteGood Tiho !
ReplyDeleteFor SP500, the trend line would be universally be bought. What could be interesting is to see what happens after: developing divergences on oscillators, sector rotation, ...
On the other hand, if you notice some useful Rydex indicators, (1) flows to Rydex Money funds are at all time lows (2) flows to Rydex Inverse ETF are at all time lows too. Being contrarian could argue to raise some cash (mean: taking profit from long positions) and/or hedge. Still too early to go short.
Fred
PS: you were right about US sectors. Mistake on my side. But EU sectors had already start to roll over.
Hi Tiho. People, don´t understand the differences between tops and bottoms. Bottoms are formed in a few days or weeks, so a contrarian have to act quickly.
ReplyDeleteBut that is not the point with tops. When there is a bit of optimism, or some indicators tell the bullish story, everybody becomes bearish (specially contrarians), but the market doesn´t make a top and fall inmediatly. No. A top, usually take a lot of weeks and you can have a NAAIM above 80% for months. You can have indicators with negative divergences for months.
The fourth year of a bull market have averaged 20% sin the last 110 years.
Ferrer - I completely agree. I will reprint my comments from the previous blog post, which discuses matters of when stock markets top:
ReplyDeleteFrom my own experience topping process or distribution, occurs when we have broader selling, while the market index itself still moves slightly higher. In other words,majority of the stocks are slowly entering their own individual bear markets as sellers dominate and buyers become exhausted.
Eventually breadth of index components tilts towards the negative side as a dominant force and affects the whole broad index. Top process ends, and a downtrend begins.
Currently, from what I personally follow, I see no topping process, nor do I see distribution by sellers, nor do I see any sign of breadth deterioration that makes us conclude sellers are coming out of hiding under the radar. As a matter of fact, breadth is expanding by day and buyers are accumulating as we speak. What would make me bearish?
Most likely a combination of most or even all of the following:
- bearish breadth deterioration & divergence
- credit markets divergence with risk assets
- cyclicals to start under performing
- financials to stop outperforming
- emerging markets to stop outperforming
- crude oil spike to be slowing growth
- treasuries to be oversold, not overbought
- us dollar to be oversold, not overbought
- sentiment to be overly bullish √
- technicals at overbought conditions √
Out of those 10, we only have 2 (with the ticks), and the last two are least important. Bull markets tend to become overbought and overly bullish, than correct or consolidate. But that doesn't top them majority of the time. Bearish breadth deterioration and divergence does.
Fred - Don't worry about mistakes. I made a thousand times a thousand mistakes. I'm glad I can help in any way, shape or form. I agree with Rydex fund flows, so profit taking if you are long could be a smart idea. I don't have any equity positions, only commodities, so I'm just sitting and watching.
The reason for Yen strength is simple and has nothing to do with repatriation of capital. Quite simply, there are not enough yen in existence to cover all the yen-denominated debts. Most of these debts are OTC derivatives written many years ago and that is why it is not commonly known.
ReplyDeleteThanks Anonymous.
ReplyDeleteany thoughts on AAPL's break today?
ReplyDeleteMy thoughts are pretty simple really. When something goes straight down (like S&P 500) like the August 11 crash, it comes straight back up like the recent multi month rally.
ReplyDeleteAt the same time, when something goes straight up like Apple in February 12, it comes straight back down.
correction is on with AAPL playing catch up?
ReplyDeleteQuite possibly. I do not follow individual stocks too much, but I am pretty sure everyone has their eye on the Apple right now. A lot of traders will attempt the short side with the recent reversal.
ReplyDeleteI invest different, where there is "no attention". I prefer Agriculture right now. I think Coffee is much better prospect on the long side, when the selling exhausts itself, than say Apple on the short side.
Other risk on asset such as AUD,High yield bond fund,sliver and copper refuse to go higher.I think it is not a good signal to stock market......correction is coming soon.
ReplyDeleteWell Silver is going higher still...
ReplyDelete