The last couple of days saw early rallies turn into ho hum closes. Not usually a great sign but judging from the new sentiment survey, the will of the very bullish is breaking and sentiment is turning more bearish, which is good.
The last time I showed the AAII Investor Sentiment Survey results, I believe the percentage of those polled who said they were bullish was at or near 60% versus those who said they were bearish which was less than 20%. The current numbers are now much better with bulls at 38% and bears at 35%.
Charts provided courtesy of www.decisonpoint.com
The bullish percent (38%) hasn't been this low since mid-August, which proved to be a great time to buy), and the bearish number 35% hasn't been this high since September. This is usually a good sign that market participants aren't too complacent so the market has a better chance to turn up. It may not shoot up today, although it could, but the odds are starting to lean toward a short term rally.
I realize I have to explain to new readers that these results and my conclusion are probably the opposite of what you might think. As I said yesterday, you want to go against the herd, or the majority. As an example of how this works, let's look at an extreme case. If the bullish percent was 100% and the bearish 0%, that would mean everyone thinks stocks are going to do great and they already have their money in the market. Who is left to buy? No one. All the money is already in the market. The only thing that can happen is they can turn more bearish and they will start to sell. When everyone has sold and there are 0% bulls, the only thing likely to happen is the bears will start to buy. There was no one left to sell. When the bulls to bears ratio hits 2 to 1, it is usually a warning sign for the market. When it is 1 to 1, it is a good sign. We are now close enough to 1 to 1.
So, although I saw the warning signs in late December, my timing of this was a bit off because of the seasonality data. We got the pullback we needed. The short term sentiment signs are now telling me it might be more safe to be in the market now. The one thing I worry about is that stat I put up yesterday (see yesterday's comments below). If we don't see some kind of a rally in the next day or two, the odds favor the market being down two months from now. If it does rally over the next two days, the odds favor a strong market over the next two months.
That sentiment data is encouraging enough for me. I will make an interfund transfer this morning and go to 50% C, 25% S and 25% I fund. This will be effective Monday morning. However, if the market can't rally today or Monday, it will send up a red flag for the near future.
That's all for today. Currently 40% G, 30% C, 15% S and 15% I
fund. Monday 50% C, 25% S and 25% I. Have a great weekend.
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Prior Day's Market Comments (see archives on left for earlier comments)
The next few days are important.
I believe the reason the market hasn't rebounded yet is because so many
people expect it to. You have to think like the minority. Options speculators are buying
calls
at 2.5 times the rate of
puts.
That is not a great sign. Options buyers are considered less sophisticated and are usually wrong
near market tops and bottoms. Once the market is punished enough,
these options traders will start buying more puts and we'll know the
pullback is over.
I really wish it was what that easy but of course they can be correct at
times. This recent drop is of some concern and I'd rather wait it
until I see something like extreme oversold levels or the market
actually put in a high volume reversal.
Jason Goepfert at Sentimentrader.com did his usual
interesting research and with his permission I'd that I'd like to share with you.
The following
criteria was met 12 times over the past 35 years...
- The S&P had just made a new 52-week high no more than 5
days ago,
-
It had just sold off at least 2% over the prior 3 days, and…
-
The Investor’s Intelligence survey reported at least 55% bulls.
While there was
no real indication of direction as the results were split, the short term seemed to dictate the
action of the next couple of months.
When the S&P was
negative after 3 days, then after 60
days this is how it did:
Percentage of time positive: 33%
Average return: -6%
Largest gain: +6%
Largest loss: -26%
When the S&P was positive after 3
days, then after 60 days this is how it did:
Percentage of time positive: 100%
Average return: +6%
Largest gain: +11%
Largest loss: n/a
So if the S&P can manage a gain over the next 3
trading days, it looks pretty good for a continued rally. If the
S&P is down from here after next Monday's close, there is a 67% chance that
the next two months will be down. And look at the largest downside
loss, 26%.
So let's watch and wait. If the market sells off real hard again
in the morning, I may get more aggressively invested in stocks.
That may be the best bet. If we open to the upside, we could see
another sell off by the close as we saw Wednesday. But we have to
keep an eye on next Monday's close.
That's all for today. Currently 40% G, 30% C, 15% S and 15% I
fund. See you tomorrow.
Keep track of your 2005 returns. Downloading the 2005 returns calculator. Click here...
www.tsptalk.com/utilities.html.