Stocks - Recording Another Low...(?)
By Frank Barbera CMT. September 1, 2009
Yes, we know, could the title of today’s article be any more provocative? Surely we have lost sight of the fact that stocks have already enjoyed a huge advance with the S&P up nearly 56% from the March lows at the recent high near 1040. Surely, we recognize the huge swing to bullishness that has taken place within the recent sentiment polls, a development that always suggests the imminent death of a major rally. Or does it? As many in the babbling media and cacophony of CNBC would like to have you believe, the swing to excess bullish sentiment is NOT an instant death sentence for equities. On Wall Street, any number of technical analysts have also been pounding away on the “excessive bulls” theme. However, we see a lot of these warnings as overdone, and potentially way early.
But let’s start by looking at the numbers that have everyone in a big tizzy, the Investors Intelligence Survey results where the latest poll showed 51.60% Bulls and 19.80% Bears. On this there were two notes of potential discord. The first off is the percentage of Bears dropping down below 20%. This may have an especially extra ominous tone to it, as one can look at the chart below and realize that the last time the Investors Intelligence Survey had a % of Bears Weekly figure below +20%, was way back on October 19th, 2007, virtually the exact week of the all time high.
Above: Percentage of Bears
Yet, prior to 2007, other very ‘low’ readings were seen on dates including September 26, 2003, December 22, 2006, December 30, 2005, June 24, 2005, December 31, 2004 and the resulting market action was mild. On a few occasions the market did set back and spent some time consolidating or correcting in mild fashion, but between 2004 and 2007, most of the sub-+20% Bear values were really caution signals, signs that the rally was stopping to pause rather than a sign that the rally was coming to an end. Another ‘fear factor’ number said to be present in this data is the high values of the Percentage of Bulls Plus Percentage of those in the Correction camp. That figure totaled 80.20% in the latest result survey, and sure enough is the highest value seen since October 2007. In the chart below, we show the 80% level with the dashed horizontal line. That said, here again we see that from 2003 to 2007 there were a number of readings over 80%, and while some of the readings did attend market readings that were close to important peaks, a number of them proved to be early and weeks ahead of market highs.
Above: Investors Intelligence Bulls + Correction Camp now over 80%.
Looking behind the data we note that the Correction Camp has been “high” for some time, dating back to the very early stages of the 2009 advance. I show this in the chart above with the thick solid line, which is the Correction Camp. The dashed line shows the % of Bulls, which has been jumping up on the Investors Intelligence Survey in recent weeks and in a way, catching up to values for the Correction category.
With this in mind I show the next chart, which is the Percentage of Bulls plotted by the dashed line in the chart above. At 51.60% last week, the indicators are starting to move up, BUT are still not up to the kind of values seen at the upper horizontal dashed line which I have drawn in at a reading of +57% bulls. With this week's downward correction, it is unlikely that the Investors Intelligence % Bulls component will move up this week, and that may ultimately mean that the stock market advance has more room to run. With respect to the Investors Intelligence Survey, I have always had my own favorite gauges, which is the 5 week average of Bulls as a percent of Bulls plus Bears. Here again, the figure is now elevated and moving into the high end of the range, but is also not yet at truly extreme values which would necessarily propose a ‘rally killer’ type of outcome.
Above: GST Investors Intelligence Bulls over Bulls + Bears (5 week average)
Even more to the point, Investors Intelligence is on the side of a number of other sentiment surveys. For example, the 5 week average of AAII (Bulls over Bulls + Bears) is only resting at a value of .48. That is a dead neutral type of reading on the volatile AAII poll and that is miles away from a signal of excess bullish sentiment. Other polls also suggest a more modest sentiment picture with both the MarketVane survey and the Consensus Inc poll pointing to relative mild levels of bullishness. As a result I just don’t believe that the recent sentiment data is a good reason for investors to turn away from the equity markets. While I do see major problems on the horizon when looking ahead at the outlook for 2010, I also continue to believe that the strong equity market advance which began at the March 2009 lows probably still has more life and could continue to advance into late October.
Above: AAII Survey Bulls over Bulls + Bears (5 week average) = dead neutral is dashed line.
Above: Marketvane weekly sentiment values
Above: 5 week average of Consensus Inc.
So far, if we look around the world, we see that almost all stock market indices are moving up in tandem with the U.S equity market. The one notable exception is Shanghai, which turned up before other markets and has consistently been doing its own thing. Even there, Shanghai looks heavily oversold and near important lower band support at the current time.
Above: the Shanghai Composite
In addition, when I pour over my charts, I do not see any major warnings signal coming yet from any of the medium term Advance-Decline or Up to Down Volume gauges. Momentum indicators also continue to look reasonably healthy, and in my book that suggests that the market could hold near present levels and actually begin yet another advancing phase. In the chart above shows the S&P 500 hourly chart through Tuesday's close, where we once again back down to short term oversold values. While there is clearly no guarantee that stock prices will record another bottom in this area, I do believe that current levels represent reasonably strong support, and any move back above 1,015 by the S&P would be constructive in the near term. Finally, I wanted to end with a overlay chart of stock prices and bond yields, where there has been a slavish relationship in recent months. Every time stock prices begin to advance, bond yields begin to advance, while declines in the equity market have – as traditionally has been the case - triggered declines in Bond yields. In some of my work, I like to watch inverse bond ETF’s, such as TBT, which at the moment appears to be putting in a potentially very major low.
That’s all for now,
© 2009 Frank Barbera