Friday Market Sentiment
Disclaimer: All charts and comments are intended for education and discussion purposes only. No investment recommendations are being offered. Please do your own research and take responsibility for all investment decisions that you make. Questions and comments related to this post are encouraged. | MON - Sector Strength | TUE - Interest Rates | WED - Market Breadth | THU - Commodities & Currencies | FRI - Market Sentiment | SAT - Bullish Percents | About | contact: HeadlineCharts@gmail.com |
Some bad news today. The ECRI threw in the towel and declared that their forward-looking indicators "unequivocally" point to recession. They had been on the fence for so many weeks I was starting to take for granted that there wouldn't be a recession.
Their future-inflation gauge ticked lower indicating low levels of inflation ahead, consistent with most of the past recessions. If ECRI is right, this means that the recent selling in commodities marks the peak for this cycle. The markets have now completed a classic intermarket pattern where long bond rates are the first to fall, then the stock market peaks and sells off, then commodities complete the pattern by peaking and falling as well.
We are now looking for the early signs that anticipate an end to the economic downturn... in other words, bond rates need to start climbing. There are some early signs that the bottoming process has begun, but how long that process takes is unknown.
Above is the weekly sentiment surveys. The bloggers couldn't stand the heat and retreated again. They are an emotional bunch and could be reversing just when they were finally on the right track. The individuals have been the best at calling the market for quite some time, despite their reputation for misunderstanding the markets. Now their sentiment has ticked up from an extreme low. The newsletter writers have really been sad and depressed about equities these last few weeks. Their sentiment has rarely been so negative towards the market, and, from a contrarian point of view, this is quite favorable for stock prices.
Above is the broad view of the newsletter sentiment survey from Martet Harmonics. Too bad this chart doesn't go back 10 years, but I took a look at the 10-year chart provided by Investors Intelligence and these readings are right where they were in the post-911 spring of 2002, and near the spring-2003 invasion of Iraq. For those with courage, good time to buy? I'm not there yet, and I'm not at all happy about the recession call by ECRI, but still you have love these sentiment numbers as a contrarian investor.
Talk about contrarian and courage. Bob Brinker continues to maintain a fully invested view towards this market because his market timing model tells him so. A piece of his timing strategy is this 60-day put /call moving average. The long-term uptrend is primarily what Brinker looks at, and it tells him that there is skepticism towards the market, and he likes that.
I like it to, a lot, but I like to add that the peaks are good buying opportunities and the lows are signs of caution. I've been really surprised for weeks that this ratio hasn't been surging as the market has been selling off and the news gets worse and worse. Finally now the moving average is hitting new highs signalling that the time is near for new money to go into stocks. I'd like it even better, though, if the average were above the upper trend line, considering the seriousness of the current market problems.
These numbers have been terrific for weeks. Insiders continue to love their own stocks which is very bullish. Investors Intelligence considers insider buying a major element in determining when to buy stocks. I'm a bit new to it and got interested by reading Brent's blog. I don't know how much importance to give these numbers, but if II and Brent think it is important, then I'm paying attention too.
The survey information above can be obtained for free via the following sites. Investor's Intelligence is from Market Harmonics. Individual Investors is from aaii.com. Birinyi Bloggers is from Ticker Sense. For additional information about market sentiment, I recommend Brent Leonard's market sentiment blog.
Sentiment analysis is an important component when following the markets, and is considered a “contrary” indicator. Contrary because if too many people are bearish then there aren't enough sellers left, the balance tips to buyers, and the market starts to advance. If too many people are bullish, most funds are already invested, the balance tips to sellers and the market weakens. One way to determine if investors are bearish or bullish is by taking surveys and tracking at what levels these polls indicate investors are at the extremes of bearish or bullish sentiment.
Keep in mind, sentiment analysis is not a science and only provides very general information. Sentiment is not a signal to take action, but provides background about the current state of the markets. For instance, there have been many occasions when bullishness reached high levels well before the market started to weaken.
