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 |
The ECRI leading economic index ticked a bit lower which is quite a disappointment. I have been a believer that the US economy is very weak but recovering quickly, or maybe I just want to believe that. The ECRI future inflation gauge hasn't moved from its low level.
There was a comment yesterday questioning whether these sentiment surveys can help determine whether a rally is a bear market retrace or the beginning of larger bull market. In my opinion, the surveys can't be used alone and have to be used with other technicals. For instance, there is no way I would be bullish on the market if the sentiment survey were highly favorable but the level of new lows and TBill rate were unfavorable. These things have to be lined up properly.
The sentiment surveys do fall to extremes corresponding with significant market bottoms and turning points. The survey readings this spring fell to levels corresponding with the survey lows of the fall of 2002 when the prior bear bottomed out. That is a good sign that a new bull is likely to emerge, but no guarantee by a long shot. However, if you combine the extreme survey low with the Dow Theory buy signal, favorable Fed Funds, strong insider buying, breakouts in the early growth sectors, etc., then you can build a pretty good case for a bull.
You can't wait to buy into a market when everything is rosy. In my opinion, you have to watch your favorite indicators, listen to your favorite market timers (IBD, Ken Tower, Bob Brinker), then make your move. At least, that's what I do. Hope that helps.
Sorry, these free charts don't go back any further than 2005. It would be nice to see the 1999 through 2004 period for comparison to what is happening currently. II produces charts that go back 10 years, but I don't want to post their charts without permission.
To be clear, I'm not telling anyone to buy stocks. I'm just offering my interpretation of contrarian sentiment using the above chart of the newsletter writer's survey... it is still favorable, but the window of opportunity it creates to buy stocks may be closing soon. The survey has ticked higher for a number of weeks now and soon it is likely to move to the neutral zone.
Brent Leonard is starting to see signs that sentiment has moved up to bullish levels that work against higher stock prices. One factor he mentions is that insider selling has picked up from it lows. However, Investor's Intelligence still likes the current level of insider selling stating that it is well below the levels of Q4 2007 when insiders were selling heavily. Note, newsletter sentiment is used a contrarian indicator but insider purchases are not. Insiders tend to be right about the prospects for the stock price of their own company.
Ken Tower likes this chart of the VIX. He has stated that the break below the 200-day is very bullish longer term. He thinks that if we were just in a bear market retrace then the VIX would have held this moving average. If the 50 crosses under the 200 it will be added confirmation that the larger trend of the VIX is lower rather than higher, and lower trend favors stock prices.
The survey information below 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 a thorough review of market sentiment, I recommend Brent Leonard. For excellent information about the VIX, check out VIX & More and Marty Chenard.
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.
