Market Indicators - Investor Sentiment

» Bill_Duffy - Re: NYSE short interest rises to record in May

-- posted by Bill_Duffy

» Normxxx - "Predicting" the Past

May 19, 2005

We recently visited the "Current Investor Sentiment" page at Lowrisk.com. Jeff Walker invites visitors to this page to express their market sentiment by predicting the direction of the Dow Jones Industrial Average (DJIA) over the next few weeks. He also generously offers weekly historical results of this ongoing poll back to May 1997. How well does this measure of investor sentiment predict the actual behavior of the DJIA?

To answer this question, we download historical weekly poll results from May 1997 through December 2004 (399 weeks) and weekly historical DJIA data from May 1997 to the present. We then calculate for each sentiment data point the change in the DJIA for 39 intervals ranging from the 26-week period leading up to the sentiment measurement date to the 13-week period after the sentiment measurement date. Using Pearson correlations to compare sentiment values with DJIA behavior over each of the 39 intervals allows us to determine whether investor sentiment is more reactive to the past or predictive of the future.

The following chart depicts the results of this analysis. It shows that investor sentiment, as measured via the Lowrisk.com poll, is generally reactive rather than predictive. Bullish (bearish) sentiment tends to rise (fall) after the stock market has risen, and vice versa. Sentiment is very weakly contrarian with respect to future stock market behavior; there is almost no correlation between sentiment and future market moves. What predictive power sentiment has is likely due to a slight tendency of the stock market to reverse after a move up or down.

<img src="http://www.cxoadvisory.com/blog/internal...">

The chart suggests that sentiment is most strongly related to the behavior of the market over the past three months. It hints that bears, with the higher absolute correlation values, latch onto the past more strongly than do bulls. It also indicates that those who claim neutral sentiment may be bulls in disguise rather than truly neutral.

In summary, investor sentiment tends to "predict" the past.

Does this conclusion mean that the crowd participating in this poll lacks wisdom? No-- it probably means that, while poll participants may exhibit diversity and independence of action, they lack private information relevant to the future direction of the market (as do we all).

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

» Normxxx - Message From Insiders?

By THOMSON FINANCIAL | 8 June 2005

Retail
The big story this week was same store sales. After an anemic April, May sales rebounded somewhat to a 3.0% y/y same store sales growth rate. Several factors impacted sales this month which are detailed below:

Weather
May was much colder than average, which would be expected to slow sales of seasonal items, especially headed into the warmer summer months. 8 of the 64 retailers mentioned weather as a negative on their sales.

Gasoline
Prices are down 9% over the past 7 weeks, boosting consumer sentiment, but still 6% higher than year ago, acting as a drag on spending, particularly at the low end. Discounters were impacted as BJ.s Big Lots and Family Dollar all missed. Wal-Mart guided analysts down last weekend, prior to today.s report.

Income
Probably the most important factor, if the consumer is not wealthier, it will be difficult to grow sales. Income data through April shows an average of 5% y/y income growth each month. However, the May jobs report on Friday reported only 78k jobs were created, this is far below expectations of 200k.

Trends
Teen Retail remains hot. Top 3 biggest surprises are all teen retailers: WTSLA reported 56.9%, BEBE 40.3% and ANF 29.0%. Bebe is not a teen retailer per se, but targets a contemporary young consumer. NMGA and JWN reported strong comp estimates, but SKS missed expectations.

The discount sector reported results that were inline with expectations at 3.0% vs. a 2.9% estimate, but higher fuel prices are likely impacting the lower end consumer more than the upper income consumer. Wal-Mart reported inline 2.5% vs. an estimate of 2.5%, but that was on lowered guidance. BJ.s Big Lots and Family Dollar all missed by large margins. Target continues to report strong sales.

Insider Activity

Well, it's official. May was the most bullish month in 2005 and perhaps the most bullish month since August 2004. At 1.6 and $31.21 respectively, the ratio of *net sellers/acquirers and the sell/buy ratio were at their lowest levels since August .04. Individual purchases were in excess of $135 million, which was the highest in eight months, and **relative purchase activity at 6.4% of all acquisitions was also the highest since August 2004. How did this increased buying activity break down by market capitalization? For Large-cap, Mid-cap, and Small-cap, May.s activity was the highest since August .04, January .05, and September .03 respectively. Therefore, we have confirming signals by headcount, dollar activity, and relative activity. Does this mean we have an all out buy signal for the market? Well no. In truth I have seen more bullish numbers. However, at the very least, the trend and the breadth of insider sentiment are increasingly positive. Since the insider sentiment, when predictive, usually sets up the next six to nine months, the recent activity could confirm what our ***research on Investment Banking and Brokerage insider activity was telling us by the end of 2004; that 2005 would finish positive.

There was positive insider sentiment by headcount across all sectors as nearly all but Utilities had seller/acquirer ratios that were less than the monthly average since the February 2003 lows; a period that had higher negative sentiment by headcount. At nearly 13% for both months, April and May Industrial sector relative purchase activity were the highest since September 2003 and Energy sector activity, with 20% of all acquisitions, was the highest since August .04. Along with Finance, Energy and Industrials led with over $20 million each in open market purchases. Technology, Finance, and Consumer Discretionary held the top selling spots but only Technology and Consumer Discretionary had proceeds/cost ratios that were greater than the monthly average since the lows of 2003. Technology had $1.1 billion is sales.

The top five industries, which had seller/acquirer and PC ratios less than their industry average and relative purchase activity higher than their average since the February 2003 lows, were Oil & Gas Expl/Prod, Trucking, Regional Banks, Internet Software & SVC, and Oil & Gas Drilling. By headcount and proceeds to acquisition costs, all were on average 50% less than their corresponding averages. For relative purchase activity, all were on average 300% higher than their corresponding averages. They were also the top 5 purchasing industries. The top five selling industries in May were Systems Software, Insurance Life/Health, Internet Software & SVC, Biotechnology, and REITs Equity Retail, where all sold in total nearly $1.2 billion . However, only Equity Retail REITs had an 80% higher seller/acquirer ratio than their average since the 2003 lows, the rest had an average of 40% lower seller activity. Internet Software & SVC had relative purchase activity that was higher than average but the rest were lower by an average of 70%

*Our net activity analysis includes option exercises as well as purchases and sales to determine the acquire/dispose classification of an insider after taking into account the option exercise cost and tax consequences.
** Relative Purchase Activity is based on the total percentage of purchase activity to all acquisition activity (purchases and exercises).
*** Investors Can Take Cues From Pros., December 20, 2004 Wall Street Journal; Page C3

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

» Normxxx - Re: Bulls- Bears

In summary, investor sentiment tends to "predict" the past.
[See '"Predicting" the Past' above.]

I'm afraid that the conclusion is that "investor sentiment" is useless as a predictor-- but 2003/2004 should have told you that.

-- posted by Normxxx

» Normxxx - Financial Insiders Abandon Ship

The bottom line is that the downside risks to financial sector relative share performance remain high and underweight positions are still recommended (with the exception of the insurance group, which was upgraded to neutral).

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

» stocksinnews - ---Your Economic Week prieview and the actuals-----

-- posted by stocksinnews

» Normxxx - ALL Insiders Now Unloading!

The insider sell/buy ratio measures the activity of corporate insiders. Given insiders’ ostensibly superior knowledge of their company’s profit outlook, the ratio can be a useful market-timing tool. The massive increase in insider selling in the past quarter is a bearish signal. It hints that insiders may expect earnings growth to slow in the near future and want to reduce exposure in advance. This would be consistent with BCA’s profit forecast for S&P 500 earnings, which points to much slower growth in the year ahead.

Bottom line: mounting insider selling is a warning that the U.S. equity rally faces increasing headwinds.

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

» Normxxx - Banks Break Down Further

By Henry To | 18 August 2005

Dear Subscribers and Readers,

We switched from a neutral position to a 25% short position in our DJIA Timing System on the morning of July 14th at DJIA 10,616. As of yesterday at the close, the Dow Industrials stood at 10,550.71 - giving us a slight gain of approximately 65 points. As we stated in last weekend's commentary, there are no new signals this week - while the "strong" performance of HPQ is quite reassuring for the bulls, judging from the Dell and Cisco reports (along with disappoint guidance from Wal-Mart ) over the last two weeks and given continuing high fuel prices (natural gas as well as crude oil prices), it now looks like technology spending is again weakening after an encouraging run since April earlier this year. Moreover, as we will show later in this commentary, the monetary tightening continues - and the actions of bank insiders are confirming this bearish development. Again, readers should continue to tread carefully in this still-overbought market.

Please note that Decisionpoint.com has just revised their calculation method of both the Rydex Asset and Rydex Cash Flow Ratios - resulting in a less oversold condition in both of these indicators. Decisionpoint.com claims their revised method now gives us a more accurate gauge of investor sentiment. For example, the Rydex Cash Flow Ratio (cumulative flows into bear funds plus money market assets divided by cumulative flows into bull funds) is now at 0.89 - down from an old reading of 1.03 just a couple of days ago.

This author will try to do more work on Japan in the following week - given that the Nikkei has now broken out of his 18-month range by surpassing the 12,000 level. Please note that the latest buying spree has all been foreign buying, as both Japanese retail investors and institutions have been a net seller of equities over the last couple of months. Historically (in the last 15 years or so), foreign buyers have usually been bad timers when it comes to the Japanese stock market. It is difficult to imagine that they will be correct this time, given continuing monetary tightening in Japan, the aging demographics, and the lack of structural reforms in the domestic economy (which is much less efficient than the American economy) so far. Readers please stay tuned.

[Normxxx Here:  Kirk: Please note above. ]

I will aim to keep this commentary as brief as possible - but please keep in mind that this will be a very important commentary. Ever since the break down of the Philadelphia Bank Index approximately six months ago, I have warned of an impending liquidity crunch— either in the domestic economy (such as the bankruptcy of airlines, auto manufacturers, or a slowdown in consumer spending) or in the emerging markets (such as a Chinese slowdown or the potential blowup of a hedge fund). The key is to focus on the marginal consumer— either a marginal consumer of credit or of energy. For example, the lower and lower-middle class of the U.S. definitely fits this bill, as the savings rate is now effectively zero and as the distribution of wealth in this country continues to widen. The dismal guidance offered by Wal-Mart in its latest earnings report can certainly attest to that.

Recent price action in the Philadelphia Bank Index has just gotten more bearish— as the relative strength of the Bank Index vs. the S&P 500 (please see our January 17, 2005 commentary for our original analysis of the bearish implications of a breakdown in the Bank Index) just made another new low as of the close last Friday. The following weekly chart shows the relative strength of the Bank Index vs. the S&P 500 from February 1993 to the present:

<img Width="520" src="http://www.safehaven.com/images/to/3640_a.gif">
Click Here, or on the image, to see a larger, undistorted image.

Given the above chart, it is not difficult to see that liquidity conditions are continuing to get tighter— especially given that the Federal Reserve has signaled that they will continue to hike the Fed Funds rate— barring a LTCM-style crisis— for the rest of this year. The following July 25th chart courtesy of the Bank Credit Analyst suggests that insiders from the financial industry is also in agreement, given the recent explosion in insider selling from the sector:

<img Align="right" hspace="10" vspace="5" src="http://www.safehaven.com/images/to/3640_...">Quote from the Bank Credit Analyst commentary: "Sellers remain aggressive and buying has virtually evaporated. The insider sell/buy (S/B) ratio has soared, and does not validate recent firmness in relative stock performance. While it is true that financial insiders remained heavy sellers until well after relative stock performance troughed in 2000, this seemingly lagging behavior likely reflects two key events. First, there was a fear that the Fed would not act to protect growth, as interest rates were only first slashed in early-2001, even though the broad corporate sector was on the verge of its worst ever post-war crunch. Second, the collapse in tech stock prices lifted all non-tech groups. Now, Fed Chairman Greenspan remains intent on pushing short-term rates higher, and financial insiders are paying heed. The bottom line is that the downside risks to financial sector relative share performance remain high and underweight positions are still recommended (with the exception of the insurance group, which was upgraded to neutral)."

A declining liquidity situation is never good for the equity markets. Nowhere is this better reflected than the recent dismal growth in M-3. Please note that the 52-week percentage change in the 20-week moving average of M-3 has recently again dipped below its 40-week moving average. The 52-week percentage change in the 20-week moving average is now 4.81%— the lowest reading since May 2004.

<img Width="520" src="http://www.safehaven.com/images/to/3640_c.gif">
Click Here, or on the image, to see a larger, undistorted image.

While there may be some "monetary overhang" from the liquidity creation days during 2001 to 2002, readers should take heed that stock prices continued to tank throughout 2002— thus probably negating some of that liquidity "explosion" during that period. Moreover, this "monetary overhang" most likely just spilled over to the housing, energy, and emerging markets. Retail investors are still very reluctant to purchase stocks here— and liquidity conditions (along with demographics) are going to "prevent" them from further bidding up the equity markets in the months ahead.

Coincidentally, the latest margin debt data (as of the end of July 2005) has just been released by the New York Stock Exchange. Despite the breakdown of the Bank Index, despite the bearishness of financial insiders and executives, and despite a continuing slowdown in monetary growth, retail investors are still choosing to speculate and to ignore all these bearish signs. This is evident by the fact that margin debt held in the custody of NYSE board members jumped over $10 billion last month— the biggest increase in margin debt since November 2004. More importantly, the total margin debt outstanding is now at its highest level since November 2000! Following is a chart we haven't shown in awhile— a chart showing the Wilshire 5000 vs. the amount of cash in both cash and margin accounts vs. the levels of margin debt:

<img Width="520" src="http://www.safehaven.com/images/to/3640_d.gif">
Click Here, or on the image, to see a larger, undistorted image.

Moreover, the cash levels in both cash account and margin accounts are now dangerously low— with cash levels as a ratio of margin debt and the Wilshire 5000 at lows not seen since November 2000 and January 2001, respectively. In a general stock market decline, there will be not much of a cash cushion, and the amount of leverage now "in the system" is a little bit on the high side— suggesting the potential for a severe decline should stock market participants choose (or be forced) to de-leverage themselves during a general stock market decline.

Conclusion: Given that the economic recovery since 2001 has mostly been about the housing industry (including mortgage consulting and financing) and the financial services industry, I would definitely pay heed to the breakdown of both the Philadelphia Bank Index, the recent explosion of insider selling in the financial sector, and the continuing decline in M-3 growth in the United States. Moreover, on a more micro level, the liquidity in both cash and margin accounts are now getting dangerously low— a red flag that is further exacerbated by the amount of leverage now "in the system."

It is now not a good time to go long— let alone go long on margin.

Signing off,

Henry K. To, CFA
MarketThoughts.com

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

» SteveT - August 19, 2005 Sentiment

I am using the VTO report for the II data. http://vtoreport.com/sentiment/sentiment...
Note for clarification historic sentiment tables are for that current week and not the four-week moving average.

Investors Intelligence Bulls 57.3% Bears 22.5% Correction 20.2%
57.3/(57.3+22.5)=71.8%
Four Week Average = 72.54%

A few historic dates: 7-20-98 68.42% 10-12-98 47.41% 4-3-00 67.79% 1-1-01 64.10% 4-4-01 58.91% 9-17-01 52.0% 9-21-01 48.7% 7-19-02 47.2% 7-23-02 47.2% 10-9-02 50.0%

Sideline Money Bears + Correction =42.7%
Four Week Average = 42.6%
hairie has researched some fascinating numbers for all time high bulls readings going back to 1965. http://www.suite101.com/discussion.cfm/i...
and lows from 1965-2003 http://www.suite101.com/discussion.cfm/i...

From Barron' s 8/22/05
The American Association of Individual Investors
Bulls 29.3% Bears 40.4% Neutral 30.3%
29.3/(29.3+40.4)=42.04%
Four Week Average = 60.65%

Historic dates for comparison:
7-16-98    44.3%        S&P 500 Close 1186.75
10-12-98   36.76%       S&P 500 Close  984.39
4-3-00     77.78%       S&P 500 Close 1505.97
1-1-01     58.82%       S&P 500 Close 1320.28
4-4-01     51.35%       S&P 500 Close 1103.25
9-10-01    47.34%       S&P 500 Close 1085.78
9-17-01    42.11%       S&P 500 Close 1038.77
9-21-01    41.08%       S&P 500 Close  965.80
7-19-02    32.88%       S&P 500 Close  847.75
7-23-02    32.88%       S&P 500 Close  797.70
10-9-02    42.36%       S&P 500 Close  776.76

As of August 19, 2005 close
The CBOE Put/Call ratio 10 day moving average is at .97. http://stockcharts.com/def/servlet/SC.we... The VIX Market Volatility Index closed Friday at 13.42. http://quote.yahoo.com/q?s=%5evix&d=t

-- posted by SteveT

» Normxxx - Re: August 19, 2005 Sentiment

I pay very little attention to "investor sentiment" as a contrary indicator of the market going forward, ever since I saw an excellent study which showed that "investor sentiment" was an "excellent predictor" of "the last six months of stock market action"! It's purported contrary action was simply due to the natural oscillation of the market (so a long bearish trend eventually reverses). Allowing for that, however, "investor sentiment" had no predictive ability.

I posted that study to this site some time ago.

-- posted by Normxxx