If you would like an email sent to you when I update the blog please send an email with "subscribe" in the subject line to traderbob58@gmail.com. To be removed use "unsubscribe".

Search This Blog or Web

Monday, March 4, 2013

Sentiment and margin debt

Here is an interesting way to look at the AAII sentiment I have never seen before.  I have mentioned a number of times that this survey is not really a great contrarian survey because sometimes they are right.


The 10 week moving average of the number of AAII bulls seems to be a pretty good confirming indicator.  When rising the market usually goes up, and when falling the market tends to sell off.  The MA has turned down now.  This is the best way of looking at this data I have ever seen.  I think I might have to try to make some time to set this up in Excel so I can keep an eye on this down the road.  I like it.

Here is the NAAIM survey.


The NAAIM number has come down to 82, but that is still very high.  Some money managers have started taking some profits for sure.  The most bearish respondent was -35.  That is barely net short.  As a comparison, somebody said they were -125 (leveraged short) on the 1/23 survey.  The trade remains heavy long with very few shorts.

Here is the latest II survey.


The number of bulls is starting to come down in this survey also.  It looks like we are past the peak of bullish sentiment now.  I think the door is opening for a correction.

I thought this was an interesting chart of the margin debt.


The margin debt sky rocketed in Jan.(+$34 billion).  That was a surge of more then 10% of the total debt.  The only time the debt was higher was in June and July of 2007.  It is now higher then it was at the final market peak in Oct. of 2007 by $19 billion.  The author claims that every time the margin debt has exceeded the Dow on this chart there has been a sell off.  I don't know how these charts were scaled.  However, it does seem to have worked pretty well, especially since 2000.  We won't know what happened in Feb. for another few weeks.  However, it is clear that taking out the Jan. low will put a lot of margin buyers under water.  This is a high risk factor for the market.  Previous margin debt unwinds have always had FED actions to stem the selling.  Exactly what is the FED going to be able to do this time?  Rates are already rock bottom and they are doing QE.  If not the FED, what else will stop the panic (besides extremely cheap prices)?  I believe doing more QE before the market crashed is probably going to increase the amplitude of the next crash.  It has probably helped fuel the margin debt buying that will ultimately ensure there is a crash.


No comments:


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