Saturday, January 31, 2009

Investor Sentiment: Good Timing

It was quite a week for me personally and for the markets as volatility returned. The direction for the markets remains down.

Briefly, about my situation. I live in the Midwest, and we were hit by 2 days of very severe weather; I have been without power for 5 days and counting. A hassle yes but not the end of the world. I am able to get on line, but my focus has not been the markets. However, this is one of the benefits of a quantitative approach like mine as I know ahead of time how I will navigate in the markets. In other words, I don't have to sit and watch the screen all day as I can put my orders in and walk away.

And that is what I did. I executed what I said I was going to do in last week's "Key Price Levels: January 27, 2009". As pertaining to the SPY (S&P500 proxy), I quote: "resistance remains at 86.78, and in the current market climate (i.e., neutral sentiment picture plus short term overbought -see below), this would be the ideal low risk spot to bet against the market on any spike in prices."

I still believe the market is headed lower, and as I have been stating for weeks, the time to get bullish will be when everyone else is bearish. As we can see from the "Dumb Money" indicator in figure 1, there are still too many bulls trapped on the wrong side of the trend. The "dumb money" looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investor Intelligence; 2) Market Vane; 3) American Association of Individual Investors; and 4) the put call ratio.

Figure 1. "Dumb Money"

The "dumb money" is neutral on the markets, and they have been that way for 8 consecutive weeks and prices on the S&P500 have fallen about 6%. While a 6% drop over 2 months is not earth shattering, on an annualized basis it is significant. Furthermore, the Feds and Treasury have thrown everything at this market (including the kitchen sink), yet there is very little upside traction. Oh, did we forget the January effect, and how bullish the month would be? January, 2009 turned out to be the worst January ever (down almost 9%) for both the Dow Industrials and S&P500.

The "smart money" (see figure 2) refers to those investors and traders who make their living in the markets. Supposedly they are in the know, and we should follow their every move. The "smart money" indicator is a composite of the following data: 1) public to specialist short ratio; 2) specialist short to total short ratio; 3) SP100 option traders. The "smart money" is bearish on equities and has been so for 14 consecutive weeks.
Figure 2. "Smart Money"

While my situation seemed rather dire to start the week, it has certainly perked up. I will be on holiday for the following week; this was scheduled and did not have anything to do with the bad weather. It was just good timing, and good timing is always better than bad timing.

I will return to the blog on Monday, February 9.

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