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Friday, June 15, 2012

Current sentiment indicators

I want to start out by showing you the McClellan summation index which uses the market breadth to show how much buying and selling pressure there is.  Here is the current chart.

Most severe corrections in a bull market get down to the -1500 to -2000.  The correction in 2010 was fairly normal.  The sell off last fall and this spring is on the excessive side.  Breadth is showing a more severe sell off then last year.    However, the sentiment data is hugely different from last year.  Lets start with the II sentiment survey.

The number of bulls has come down very similar to last fall.  However, look at the number of bears.  It is now 26% and at the time of the maximum selling pressure in the summation index in late Aug. it was around 35% bears.  The percentage decline was much bigger last fall so it makes sense that was more bearishness then.   In more then 10 years of watching this survey I don't recall ever seeing the market bottom and turn up with a -2500 or worse summation reading without the number of bears crossing above the number of bulls.  Normally they are much closer by now then they are this time.  There appears to be some complacency in the market news letter writers.  The more the writers tell their readers they are bearish the more the selling pressure gets exhausted as their clients adjust their portfolios.  In this situation, there could still be some significant selling pressure if the market heads down again.

Next up is the nova/ursa ratio.

At .26 we are well above levels normally seen at major bottoms (.1-.15).  Notice the move up in this ratio on the current bounce is small compared to the move in the market.  I guess some traders are not really buying into the move.  If the market goes up from here there could be some bull fuel if we get to the point where traders start really buying into the move.  You can see the ratio diverged from the market early in the year, but eventually started moving up again and the market accelerated up.  Sometimes the traders are right and the market moves down when it diverges like this.  That we cannot know until later.  What we do know is with this ratio at the .26 area there could still be considerable selling pressure if the market heads down again and even more traders bail.

Next up is the NAIIM survey.  This is the most recent addition to the surveys I follow and I am still learning about how to use it.  The chart is not working on their site for some reason so I can't show it to you.  Last week the number was 49 and this week the number is 44.  That is very near the middle of the range.  I would say active money managers are cautiously long.  During this consolidation that has lasted more then a week, active investment managers in the survey reduced their long exposure.  In late Aug., at the time of the low in the summation index, the number was 20.  In 2010, the number was 28 around the time of the flash crash, but by the time of the ultimate low in early July it was 37.  Unlike last year where the ultimate low in the number and the market occurred at the same time, they had already started buying stocks before the final low was made.  This is pretty similar to the nova/ursa ratio.  There is some money on the sidelines to fuel a rally should the market get going up, but there is also enough money long to provide selling pressure if we start down again.

The bottom line is that we don't have the usual sentiment readings that occur when making a bottom with this much selling pressure.  Given the headlines going on in the world, I find that quite curious.  Back in 2010 they all panicked because Greece might need a bailout.  Now Spain, a much bigger problem, is feeding at the trough and nobody is worried.  Until everybody gets scared out of their long positions there is still potential selling pressure and down side risk.  However, there is some money on the sidelines to fuel a move up as well.  We will just have to see if the market continues down from here or puts together a rally.  It is pretty hard to tell at this point.


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.