I have often contended that there are two ways to interpret sentiment data. The first is as a contrarian. Figure out when too many investors are on one side of a trade and bet the other way. This is the "traditional" way most interpret this kind of data. The second method of interpretation is based upon the fact that investor sentiment will track the movements of price. So as prices move higher, we would expect bulls to increase; as prices move lower, we would see investors express their bearishness. It is the rare situation (believe it or not) where investor sentiment and price actually deviate. To read more on variant uses of sentiment click here and here.
Sunday, February 27, 2011
Friday, February 25, 2011
It is my belief that we have seen the high in long term Treasury yields at least for a while, and I expressed this opinion in yesterday's article on Treasury yields. Today, I thought it would be instructive to look at the bullish technical patterns developing in the i - Shares Lehman 20 plus Year Treasury Fund (symbol: TLT).
The morning news notes as prepared by TL...Goldman Sachs on crude oil, crude margin requirements move higher, China monetary policy, the White House on the government shutdown, mortgage servicing settlement, Wisconsin and European bailout fund.
Thursday, February 24, 2011
Lost in all the noise about crude oil this week and its effect on the economic recovery (i.e., the equity rally) has been the top in Treasury yields. This article will cover the technical aspects of the Ultra Short Lehman 20 plus Year Treasury Fund (symbol: TBT).
The morning news notes as prepared by TL...banks and mortgages, Libya, crude oil and the economy, Saudi Arabia, and Gallup Poll on Republican presidential hopefuls.
Wednesday, February 23, 2011
Two consecutive down days in the equity markets must seem like Armageddon for those whom forgot the markets can go both ways. But let's be real. Nothing has happened. A 3% down draft in two days after a 30% moonshot in the SP500 over the past 6 months is nothing, and at best, this week's events serve to remind investors that markets MAY go in both up and down directions. Risks have been rising for awhile, and it is just not because the bullish (sic: foolish) extremes in sentiment. Rising and persistent trends in the CRB Index, gold, and yields on the 10 year Treasury are significant headwinds. Crude oil had a high probability of trading higher. Something had to give, and investor sentiment is just one part of the market puzzle.
The morning news notes as prepared by TL... Libya, US shutdown risk, Saudi spending boost, Saudi Arabia - risk of unrest?, Bahrain, war is inflationary, India will be world's largest economy by 2050, Portugal nears "D-Day", and 401K's rise at Fidelity.
Tuesday, February 22, 2011
What happens when excessive bullish sentiment meets extreme conditions from our indicator constructed from the trends in the CRB Index, gold and yields on the 10 year Treasury?
A quick look at the headlines over the past weekend shows that this country's fiscal crisis is being brought into greater focus. States are proposing cutbacks, and governors are telling constituents that we cannot kick the can down the road any longer. It all makes sense, and it is rhetoric that we have all heard before, and in politics, words speak louder than actions.
Sunday, February 20, 2011
As I have been alluding to over the past couple of weeks, anticipating a correction (beyond 1% from the near term highs) in the equity markets has been very brutal. This market has made road kill of a lot of analysts and indicators. With that being said, this week's sentiment update not only has the "dumb money" being bullish (as expected) but company insiders (the "smart money") have increased their selling significantly. This is the third time since November, 2010 (when the Fed started asset purchases) that these three indicators have been aligned in such a manner. Will the third time be the charm leading to a correction and a better risk adjusted buying opportunity?
Friday, February 18, 2011
One of the strategies that I have frequently written about for the SP500 involves the 40 week moving average and the composite indicator constructed from the trends in crude oil, gold, and yields on the 10 year Treasury. When these trends are strong and rising, the SP500 faces stiff headwinds. This is data going back to 1984 and includes the 1990's as well. In essence, using this indicator as a filter for a SP500 simple moving average strategy can increase returns by about 25% while reducing maximum draw down by 50% over buy and hold. In other words, just stay out of the market or hedge yourself when the collective trends of gold, crude oil, and yields on the 10 year Treasury are strong and rising.
The morning news notes as prepared by TL... borrowing at ECB facility has been exceptionally elevated this week - the cause?, China tightens monetary policy, the US budgetary process rolls onward, the unemployment rate, and cotton has gone parabolic.
Thursday, February 17, 2011
The morning news notes as prepared by TL... bank stress tests, US companies repatriating cash, municipal bonds, Middle East tensions ease, politics including spending and budget cuts, and government shutdown?
Wednesday, February 16, 2011
I last looked at crude oil -- specifically West Texas Intermediate -- several weeks ago, and the technical set up was pointing to a strong price move and sustainable trend over the next year. That set up remains in play although prices are hovering near the 200 day moving average. In essence, the technical set up appears to be failing, but we won't know this until the end of the month. With lower prices of WTI, the risk on this trade has been reduced significantly. In other words, buying now at these levels is low risk. But we just don't want to buy indiscriminately, so here is the short term technical set up that needs to play out on the road to higher prices.
The morning news notes as prepared by TL...Citigroup on global economy, JPMorgan on emerging markets, China's appetite for US Treasuries on the wane, capital spending increasing, demand for gold in China, Middle East unrest, will the government shut down?, municipal bonds, farm prices surge, and Fed's Fisher on unwinding current easy monetary policy.
Monday, February 14, 2011
The morning news notes as prepared by TL...Egypt, US trade deficit widens, Americans perception of which country is the world's economic engine, Obama's budget, and the debt ceiling.
Sunday, February 13, 2011
As expected, the bullish extremes in investor sentiment persist. Company insiders continue to unload shares at a high rate. As I have brought forth over the past couple of months, these data points (and those of most analysts) have not mattered as the major indices keep marching higher. It has been very brutal if you are anticipating a correction. It has been brutal if you are short, and it has been brutally hard to sit on your hands and do nothing while you wait for an entry point that is more than 1% below the recent highs. At this point, divining when a meaningful correction will happen is only guess.
Monday, February 7, 2011
Sunday, February 6, 2011
"Faster than a speeding bullet! More powerful than a locomotive! Able to leap tall buildings at a single bound!"
"Look! Up in the sky!"
"It's a bird!"
"It's a plane!"
Friday, February 4, 2011
I would describe the current price action in the equity market as meaningless. It doesn't impart any information to me as the dip is always bought albeit on persistently shorter and shorter time frames. On the other hand, long term Treasury yields are on the rise and breaking out from their current trading range. Rising yields will be a headwind for equities, and are likely a sign of inflation worries.
Thursday, February 3, 2011
Lately, I hate to bring up any data point or indicator that is contrary to the market moving higher because nothing (and I mean nothing) has made a damn bit of difference to the constant and persistent march of the major equity indices moving upward over the past 4 months. Breadth divergences. Don't work anymore. Sentiment. Who cares? Inflationary headwinds. We don't have inflation. You get the picture. But being the hard headed soul that I am, I thought I would try again.
On the surface it seems like a great idea. The Federal Reserve jump starts the economy through asset purchases, and all is ok because inflation is under control. The stock market goes up and the official inflation numbers remain tame although everything we touch and need to function and subsist day to day goes up in price. What a great thing. What a great country we live in. And most importantly, why didn't we think of this before?
Wednesday, February 2, 2011
When looking at the Dollar Index, I am reminded of the song the "Cha Cha Slide"when the performer says, "How low can you go?" There is no question investors believe that the Dollar is going down and that equities are only going up all courtesy of Federal Reserve Chairman Bernanke and his QE 2 policy. Yesterday's rally in equities and concurrent drop in the Dollar served to remind me of the fact that currency devaluation and increasing liquidity remain the drivers for equities. It has been that way since 2007, and why should it stop now? For the record, the Dollar Index was down a hefty 0.86% yesterday while stocks enjoyed a strong trend day.
The morning news notes as prepared by TL...ADP employment, Fed passes China as largest holder of Treasuries, the Fed remains dovish and is thinking about QE3, energy tops sector returns for January, Egypt, and Yemen.