Extremes Continue to Build Up
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Let's go over a few examples.
The AAII sentiment survey has dropped to an extremely pessimistic level when using a four-week moving average. Prior instances over the past 20 years of such a low reading have resulted in intermediate-term gains nearly 90% of the time.
The latest data from the folks at lowrisk.com showed that only 18% of the respondents to their poll said that they have bullish leanings. That's the lowest amount since June and is in the bottom 4% of readings over the 10-year history of the survey. The three-month return after prior readings when the Bull Ratio of the survey was this low averaged +5.5% with 12 out of 14 instances showing a positive return.
Rydex traders are fleeing the sector funds. This cannot be explained by the secular trend of assets leaving Rydex for ETFs or other fund families— just a month ago, more than 85% of the Rydex funds had assets greater than their average of the past 50 days (a very overbought reading that anticipated the current selling pressure,). Yesterday, only 9% of their funds currently had assets greater than their 50-day average, but after the new numbers came out that reflected yesterday's decline, that percentage dropped all the way down to 3% (only 1 fund out of 33)!
Unbelievably, that's the lowest number since March 12, 2003 as the bear market was suffering its last tortured hiccup. The only other times it has dropped this low since 2000 were a few days in mid-March 2001, a few times from June through July 2002 and early February 2003. Those in June 2002 were terribly early in terms of calling a low, but otherwise the others were good indications that the selling pressure had become too much.
After prior extremes in both of those indicators, though, there was short-term selling pressure more often than not. But, following an options expiration week like we've just had, holding off until Monday and being long 'til the end of the week was generally positive. And Thanksgiving break is next week as well— according to Seasonality, the days immediately surrounding the holiday have shown a consistently positive bias.
Selling pressure is evident from the latest mutual fund flow statistics from AMG Data. While AMG notes that "significant capital gains distribution cash payouts contributed to the anomalously large number", the net outflow from equity mutual funds in the past week was— $9.6 billion, the most since mid-July 2002.
With mutual fund cash levels at such low levels, fund managers have little choice but to sell when they're hit with a sudden flood of redemption notices. The only thing making me hesitate to suggest that this is, therefore, a tremendously bullish contrary sign is AMG's disclaimer about cap gains distributions. I don't know how much that impacted the numbers.
If everyone is selling, then who's buying? Well, corporate insiders for one. InsiderScore.com (an extremely useful service for institutional customers) revealed their latest Buy/Sell Ratio for this week, and it jumped to its second-highest level in the past few years. The only weeks that eclipsed this week were the two in mid-August as insiders bought aggressively into the initial subprime meltdown fears.
Most of my sentiment indicators are at "Bullish" extremes, and just a few stragglers are still "Bearish". But, I'm not too concerned about those bearish ones, except for the Nasdaq/NYSE Volume Ratio which continues to show excessive volume flowing into so-called speculative shares listed on the Nasdaq.
The short interest data for the Nasdaq is at a bearish extreme when compared to the past year, but not even remotely so when compared to the past decade.
The Mutual Fund Cash Position is also bearish, but it has been so for two years. It is questionable as an indictor with interest rates so low and liquidity still so available, so as far as I'm concerned it's best ignored until it starts clearly working again.
It seems reasonable to suggest that we're in the final spasms of hammering out an intermediate-term low, especially considering that the most consistently positive time of the year is about here (although the 40-week cycle was due to bottom at the end of this month). "Everyone" already knows this and the annual cycle is being talked about a lot, so perhaps that makes it less likely, but...well, it's never wise trying to outguess the indicators. And, anyway, the year from here to election day is the second best year of the 4-year 'presidential cycle.'
The technical condition of some of the major indices is a concern (namely the series of lower highs and lower lows in the S&P 500, and the flat or declining longer-term moving averages), and quite frankly I'm a bit put off by just how extreme some of these indicators are when we've corrected so little. But until I see a failure of such oversold extremes to trigger a meaningful rally— and I haven't really seen one of those since June 2002— I'm going to keep assuming the best.
Early next week could still be dicey before the consistently positive Thanksgiving period kicks in. Today's action and the short-term oversold readings could be enough to suggest that we've already seen a successful re-test of Monday's lows and it's up, up and away from here. But, given the questionable technical condition in the S&P and the other data, though, I'm holding off on that idea for now. I'd like to see another day or so of choppy to weak performance to set up a better risk/reward ratio. Maybe that's trying to be too perfect in an imperfect business, but it's how I see the odds stacked up.
At these times, it's always a fierce battle between having the patience to hold for and then lock in what appears to be an entry with good risk/reward characteristics, versus being too cute by trying to find the perfect one. There's no right answer, it's all a matter of personal risk tolerance, depth of capital, time frame, etc.
So the market is somewhat oversold again, has some looming positive seasonality, and is clinging to support just above the week's lows. That should set us up for higher prices into the latter part of next week, but, again, I'm not sure how the early part of next week is going to turn out.
Bottom line: we're likely at or within a few days of a tradeable low— probably an intermediate-term low. The risk/reward for longs appears good, with the caveat that a move under what should be support around 1430 on the cash S&P 500 index should trigger sell stop orders and potentially a quick drop. Seeing that kind of washout and a reversal would be the best indication that the selling pressure is exhausted. So I'd stick with long-side trades, but if we get weakness Monday or Tuesday, watch for a potential quick move at or under that 1430ish area to set up a better short- and intermediate-term entry.
Normxxx
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