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Market Comments

May 23, 2011

Current TSP Share Prices

Seeing negative signs, but is sentiment too bearish?

After a turn-around Tuesday last week, followed by a two-day rally, stocks moved lower again on Friday. The Dow lost 93-points on the day and we now haven't seen a 3-day rally since the market peak at the end of April.

For the TSP, the C-fund was down 0.23% on Friday, the S-fund lost 0.62%, the I-fund fell 0.61%, and the F-fund (bonds) added 0.08%. For more on the weekly and monthly returns, please see our TSP Weekly Wrap-Up.

In a bull market it is usually wise to be a buyer after a 2 to 3 day pullback, and selling after a 2 to 3 day rally during a bear market. Recently we have seen the S&P 500 move into a short-term downtrend and since late April, selling a 2 day rally would have saved us some money. But how serious is this change in character?

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

As I write this on Sunday night, the overnight Dow futures are down another 50+ points and it appears we will start the week on the downside. I am seeing a lot of pessimism out there with many calling for a market top. The chart does look a little "toppy", particularly with the rising trading channel breaking down recently (green lines.)

Sentiment is a contrarian indicator and it has been one of the most constant indicators that I have used over the years. Just take a look at our very simple TSP Talk Sentiment Survey System over the last few years to see how effective it is to fade extreme sentiment readings. By the way, the survey came in at 1.43 to 1 bulls (50%) to bears (35%) ratio last week. That is a neutral reading so the system's allocation remains 100% S-Fund for this week. The system is currently up 8.48% in 2011, through Friday's close.

Last week we talked about the AAII survey showing how bearish "the herd" was. These are individual investors who are normally wrong when the reading is extreme, and the 0.66 to bulls (27%) to bears (41%) ratio is pretty extreme on the bearish side (bullish for the market.)

Another major survey is the Investor Intelligence Advisor Survey which polls newsletter writers. They are usually a little more on top of things, but they still tend to be wrong when we see an extreme reading. You can see that they are a lot more bullish (46% bulls, 20% bears) than the individual investors, but the bullish percentage has dropped 12% in the last several weeks while the market has actually been flat to slightly higher.

                       Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

SentimenTrader.com, found other times when the percentage of bulls dropped 10% or more, while the S&P 500 rose, and was within 3% of a 52-week high. This is from 1981 through 2011...

                                    Chart provided courtesy of www.sentimentrader.com

From Jason at SentimenTrader.com...

The S&P was in a major bull market for most of the past three decades, which certainly helps the results. But still, when we've seen this setup in the past, stocks did very well going forward, especially in the shorter and longer-term.

One month and six months later, the S&P sported a negative return only once out of 16 chances. The market's average return in those cases were very good, typically more than +3% and +8%, respectively.

During the next six months, the S&P's maximum loss averaged less than -1% (using weekly closes). Only one saw more than a -5% correction at any point. But 12 of them saw a rally of more than +5% at the best point and 9 of those were more than +10%.

So I am having a hard time getting bearish on the market, but I am certainly aware of the negatives out there, including the negative fundamentals of the economy and the negative technical picture of the chart of the S&P 500. I guess I am in "show me" mode. Show me that the extreme bearish sentiment we are seeing is "different this time."

This week is a pre-holiday week and from 1950 to 2004 the week prior to memorial Day weekend has had a negative historical seasonal bias The seasonal strength picks up after the holiday.

                                     Chart provided courtesy of www.sentimentrader.com

Thanks for reading! We'll see you back here tomorrow.

Click here to discuss today's Market Commentary Tom Crowley

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