Market Indicators - Investor Sentiment: CAUTION!

» Normxxx - CAUTION!

by Dr Joe Duarte | December 13, 2004

[Normxxx Here:  Kirk: Bulls!?! You have trouble finding Bulls? You haven't been looking very hard! ]

Market sentiment continues to suggest that this is a very vulnerable market to disappointments and external events.

Newsletter writers, as measured by Investor’s Intelligence have reached levels of bullishness usually associated with market declines. Our MASI indicator has again given a sell signal.

The CBOE Put/Call checked in at 0.63 on 12-10, a neutral reading. This indicator is now neutral and will require several readings above 1.0 to make it bullish again. The indicator read 1.07 on 10-14 for the second consecutive day, after the 1.01 reading on 10-8 and the 1.00 on 10-12. This is still a good string of bullish readings. But the market is ignoring the wall of worry. Recent bullish readings have been 1.10 on 9-22, 1.05 on 9-8 and 1.03 on 9-3. This has been a good run of pessimism as the market has stopped falling, as it followed a fairly good reading of 0.92 on 9-2, and a bullish reading of 1.05 on 9-1. Other good readings preceded the recent bottom, such as the 1.03 on 8-10, and the bullish 1.38 on 8-6 which finally eclipsed the readings of 1.12 on 7-16, and 1.17 on 7-12. We like to see investors turn bearish when the market starts falling, and we also like to see them remain cautious as markets rally. A consistent string of low readings can be a sign of excessive optimism and often signals a top in the markets. Readings below 0.5 are of concern, but not as serious as readings below 0.4. Readings above 1.0 are bullish. The numbers cited here are meant to be evaluated on a closing basis.

The CBOE P/C ratio for indexes on 12-10 was 1.34, hardly a reversal of the 1.0 it delivered on 12-10, which quickly knocked the indicator down from 1.80, on the previous day. This is of some concern, as it shows a rapid deterioration in the wall of worry. The reading on 11-19 was 2.53, a bullish reading, which followed several weak readings, 1.08 on 11-8 and 1.02 on 11-17. Recent bullish readings were increasingly distant than the 1.95 on 10-5, and the 1.83, on 10-4. The 9-29 reading of 2.32 was very bullish, and launched a nice end of month rally. The ratio was 1.81 on 9-27, and correctly predicted a bounce. The 9-20 reading was 2.42, as high a reading as we‘ve see of late. Recent bullish readings have 1.97 on 9-15, 2.24 on 9-10, and the 9-8 reading of 2.29. The reading of 9-1 was 2.20, a bullish reading, exceeding the 7-16 reading of 1.92, and the 7-12 reading which was 1.96. Readings below 0.9 suggest too much bullish sentiment, just as readings above 2 are usually required to mark major bottoms.

The VIX and VXN had readings of 12.76 and 19.57 on 12-10. Both have again turned lower. When these indexes begin to rise, it is a sign of concern as rising volatility indexes suggest that an acceleration of the prevalent trend is on its way. In this case the implication is that the down trend is going to assert itself. This series correctly predicted that a trend change was on its way. If the volatility indexes begin to rise, it usually means that the market trend is about to change, usually to the down side. A fall near or below 20 on VIX and 30-40 on VXN is considered negative, a fact that is usually confirmed when the volatility indexes begin to rise. Readings above 40 and 50, respectively, are often signs that a bottom may be close to developing.

Newsletter writers reached new weekly highs on bullishness on 12-10. For the week ending 12-10-04, the 13 week moving average of the ratio of Bulls/ Bulls + Bears from Investor’s Intelligence’s weekly sentiment figures crossed above 70%. Major rallies have traditionally been launched usually when this indicator falls below 40%.

[Normxxx Here:  Myself, with these low VIX and VXN readings, I believe the market isn't going anywhere in the near term! ]

The futures traders polled by Market Vane dropped to a 62% level of bullishness from last week’s 69% reading. This survey delivered a sell signal on 2-20, with a reading of 70% bulls on stocks, which preceded a significant market decline.

Our Big Trend Model fell to 47.5 from last week’s 62.5% on 12-10-04. We don’t like it when this indicator loses a lot of points in a hurry, as it often points to a loss of momentum in the market. Readings near or below 40% often precede market bounces, but may initially be signs of caution when markets have had a rally. Readings above 80% are usually bearish. The Big Trend Model is composed of technical and monetary indicators and updates automatically on a weekly basis.

Our MASI indicator has given another sell signal, its fourth sell signal in six weeks. We don‘t like to see MASI start to deliver clusters of sell signals. The indicator gave an accurate sell signal on 10-8. MAGI is still on a buy signal, after it correctly gave a sell signal on 7-2, its first after gave a buy signal on 4-9. When these two indicators agree, the market usually follows in the direction of the signals. MAGI is based on the weekly data provided by Investor’s Intelligence’s poll of newsletter writers, a group that has been bullish for several years, and stayed bullish and wrong, throughout the bear market. When both indicators agree, there is a high degree of correlation with a significant market move. When these indicators disagree, it is often a sign that the market is about to go nowhere but that volatility is on the verge of increasing. MASI buy signals when MAGI is bearish are rarely worth acting on. MAGI is an intermediate term indicator with an excellent predictive record. The best market bottoms occur when both of these indicators are both on buy signals, a telling sign of intense fear on the part of investors. MASI and MAGI are sentiment indicators that are updated on a weekly basis.

The NYSE insiders were buyers of stock on 11-26, but only mildly reversing the selling from the prior three weeks. This set of indicators is still overall bullish. We would become very concerned to see increasing levels of short selling by the specialists, which is still not evident . We will be watching this indicator carefully over the next few weeks, for that development. This indicator is very positive when short selling by the specialists is low as the same time that they are net buyers of stock. This is a set of very smart investors, and when they turn positive or negative, it is just a matter of time before the market follows. Spec data is released to the public with a two week lag, so is not useful as a market timing tool, but is excellent background and confirmatory information.

The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.

-- posted by Normxxx