Sentiment (%-bulls) has reached an extreme value and is now at my sell point for this indicator. The sell point is based on a number generated from statistical analysis of the extreme sentiment at the bottom after the 2000 dot.com crash, basically, a multiple of standard deviations from the mean. That same data can be extrapolated to indicate a sell point at the top.
While the sell point is based on statistical analysis and can fluctuate, the sell-point is presently 85%-bulls calculated as {bulls/(bulls + bears)} based on amounts invested in selected Rydex/Guggenheim bull and bear funds. With sentiment now at 85%-bulls, it means that 85% of investors are betting long in those funds. This is an extreme and since the herd is usually wrong, this is a bearish indicator.
Sentiment is only one indicator and by itself would not generate a SELL signal overall, but it is instructive to see what the return has been during periods when the Sentiment indicator flashed sell.
I looked at 3-years, 2012 thru 2014, and found that there were 126-days when the indicator was Sell. There were a total of 755 trading days over the same 3-year period, so the sentiment indicator was Sell about 17% of the total time. The total gain over the 126-days when sentiment was SELL was -0.75%. The biggest gain was 1.2% and the biggest loss was -2.3%. Basically, periods when sentiment was at an extreme value were not great times to be invested.
I find it hard to believe that bullishness has reached a value of 85%-bulls during what is arguably one of the more worrisome times for investors in recent years. For perspective, there has only been 1-day (9 Apr 2014) when the sentiment reached 85% since the financial crisis. (Since a sell-signal is based on statistics, prior sell signals over the last 3-years have been at levels considerably below 85%.)
Currently, there is an amazing level of complacency. If the news turns bad, it is likely that there will be further panic days ahead.
JOBLESS CLAIMS RISE (WSJ)
“The number of Americans filing new claims for jobless benefits rose last week, but the level remains historically low. Initial jobless claims, a proxy for layoffs across the U.S. economy, increased by 10,000 to a seasonally adjusted 281,000 in the week ended June 27…”
http://www.wsj.com/articles/u-s-jobless-claims-rise-to-281-000-1435840335
NONFARM PAYROLLS (Briefing.com)
“Nonfarm payrolls added 223,000 jobs in June after adding adding a downwardly revised 254,000 (from 280,000) in May….Despite the initial claims level trending near 15-year lows, there is still considerable amount of slack in the labor market. That explains both the poor wage data and the weak labor force participation rate.” Details, charts and more at…
http://www.briefing.com/Investor/Calendars/Economic/Releases/employ.htm
FACTORY ORDERS (Reuters)
“The Commerce Department said on Thursday new orders for manufactured goods dropped 1.0 percent after a revised 0.7 percent decline in April. Factory orders have dropped in nine of the last 10 months.” Story at…
http://www.reuters.com/article/2015/07/02/us-usa-economy-factory-idUSKCN0PC1KG20150702
MARKET REPORT
-Thursday, the S&P 500 was basically unchanged at 2077 at the close.
-VIX rose about 5% to 16.91.
-The yield on the 10-year Treasury dipped to 2.39%.
SOME CAUTIONARY THOUGHTS
-Sentiment is extreme.
-The 50-day value of stocks advancing on the NYSE remained 48%. Simply, that means that less than half of the stocks on the NYSE have been going up over the last 50-days. That is not a good sign. It hasn’t done that since last October’s 7% mini-correction.
-In a related stat, the percentage of stocks above their 200-day moving average remained 43% Wednesday (data is a day late). This is 2-standard deviations below norm and is suggesting trouble.
-In the last 10-days, only 39% of the total volume on the NYSE has been up-volume. (That stat was 41% Wednesday.)
-Statistical analysis has been indicating a possible top due to the small moves in price-volume when compared to the norm.
SOME BULLISH THOUGHTS
-VIX has moved down some.
-If we see improving internals, that would be a positive sign for the stock market and might indicate that a correction might be avoided. So far, not enough positive improvement in market internals has occurred. Some internals are better; some are worse.
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of the percentage of stocks advancing (NYSE) slipped to 45% at the close Thursday. (A number below 50% is usually BAD news for the markets.
New-lows outpaced New-highs Thursday. The spread (new-highs minus new-lows) was minus-62 (It was -126 Wednesday
The 10-day moving average of change in the spread rose to minus-13. In other words, over the last 10-days, on average; the spread has DECREASED by 13 each day.
Internals switched to negative on the markets. This is not a good sign for the future.
Market Internals are a decent trend-following analysis of
current market action, but should not be used alone for short term trading.
They are usually right, but they are often late. They are most useful when they diverge from
the Index. In 2014, using these
internals alone would have made a 9% return vs. 13% for the S&P 500 (in on
Positive out on Negative – no shorting).
Of course, few trend-following systems will do well in an extreme
low-volatility, nearly straight-up year like 2014.
NTSM
Thursday, the NTSM long-term analysis switched to HOLD. SENTIMENT IS NEGATIVE. PRICE, VIX, and VOLUME indicators are neutral.
MY INVESTED STOCK POSITION
Tuesday, I cut my investments from 50% invested to 30%
invested in stocks, all in an S&P 500 index due to my SELL signal on
Monday.I am keeping 30% invested since it assures I will have gains if the market goes up. On the other hand even in a worst case scenario I would only lose 15% in the unlikely event the market were to be cut in half.
THRIFT SAVINGS PLAN (TSP) MEMBERS
My TSP Allocation: 70%-G; 30%-C.
