Weekly Street Sentiment: Sell-Side Tells Buy-Side the Rally Is Over

After 16 weeks, 35% gains and more prayers to assorted deities than you can shake a stick at, the sell-side sentiment fell enough between Friday, June 19 and Friday, June 26 to cause the first “sell” signal since the First Coverage Market Index (i.e., sell-side sentiment) turned bullish at the start of March. And, even though Monday saw sentiment tick up a touch, and there was uncertainty reflected in the sell-side closing out more positions than they opened last week, as they say in the Old West, “The damage, she be done, and we be short!”

So, what are you supposed to do now?

We’ve waited 16 weeks for the sell-side to throw in the towel and now it’s happened. What’s your next move and how predictive are these sell-side shifts known to be?

Let’s start with the easier question of the two. How predictive? Well, the last two shifts of the First Coverage Market Index occurred on the following dates:

Last Bearish Shift:

January 16, 2009

S&P 500 Return until Index went Bullish: -19.6%

Last Bullish Shift:

March 6, 2009

S&P 500 Return until Index went Bearish: +34.3%

Over the last two and a quarter years, the sell-side has shifted their opinion on the market 14 times. These sentiment shifts have led to trends that ranged in duration from one to 26 weeks, and on average around 10 weeks. Had someone simply been following these “switches,” they would have been on the right side of most sustained trends in the market since 2007 and managed to turn $1 into more than $3.

Any signal that triples money over a two-year period demands scepticism, especially when that signal is based on the collected opinions of a group of people that have their own, individual agendas. So, the next question that needs to be addressed is, “Why, in this market condition, would something like “sentiment” be working so well when most traditional indicators have struggled to make money for portfolio managers since August 2007?”

We wrote about this recently in a 12-page white paper, and the conclusion was that there is quite a bit of capital that used to be run in a highly levered manner by quant funds that is no longer in the market place. Post the August 2007 quant melt down, the capital was either redeemed or levered way back, leaving a void where algorithms were historically used to balance off fundamental sentiment-driven investors (or irrational investors depending on your bias) and drive down market volatility.

Over the last two years, without this arbitrageur capital in play, this market became a lot more volatile (check the VIX) and susceptible to the whims and desires of investors to take it higher or lower. In fact, if you’ve read this weekly commentary in the past, you would know that the sell-side’s steadfast bullishness since March 6 is exactly the type of unwavering optimism’ that we contend gave way to a rally in which all data ― good, bad or indifferent ― was given the benefit of the doubt and continued to propel the market higher.

But now things are different and unlike other sentiment indicators out there that try to distill some form of market activity into a proxy for sentiment (e.g., put/call ratio, earnings revisions, etc.), this indicator does not take the standard belief that activity equals sentiment. In fact, this indicator is predicated on the notion that activity will follow a shift in sentiment.

It’s a given that sentiment is formed ahead of action being taken, and this index is gathered by examining the thousands of ideas and conversations that are being discussed between the sell-side and the buy-side in real-time (read the small print below). When our index demonstrates a significant change in sentiment, it is a reflection of enough people from enough firms telling enough clients on the buy-side that things are different. Those conversations in isolation aren’t enough to change any person’s opinion. But in the magnitude that’s necessary to cause a significant move in our indicator, now you have the start of a sentiment shift. Enough of those conversations happening at the same time combined with current market conditions, and you have typically, but not always, seen a significant change in asset allocation one to two weeks down the road.

So, while you are mulling all that over, here are the five stocks that underwent the most bullish and bearish shifts in sentiment over the last week:

[Note: in the top chart, the ticker for Rio Tinto is RTP, not RIO as indicated.]

Comments

[jayminho:]

oh really ? who said so ? the super league of frinds, "ex"-perts analystis and the triple A giveaway agencies ?

hahaha

Jun 30 08:47 AM

[ain't no fo...:]

"Sell-side tells buy-side the rally is over"?

That's naive hogwash from a recent past that no longer has any validity whatsoever.

Obama tells Summers to tell JPM and GS program desks to gun the SPX's again, the rally is still on and let's keep this South-side hustle going, we have to convince the sheeple we're on the rebound and to spend spend spend.

That's ALL you need to know. The government owns this market lock stock and barrel, the government has funneled many billions through its proxies at GS and JPM, who were the paid hit men who destroyed competition on the Street, and with it liquidity, transparency and price discovery.

The Administration is calling ALL of the shots on Wall Street, is orchestrating all of the rally in these illiquid, dying markets, and to think otherwise is just plain naive.

Please Mr. Obama, give us back our markets.

Jun 30 09:57 AM

[conceptwizard:]

According to John Crudele of the New York Post, the Plunge Protection Team's (PPT) modus operandi was revealed by a former member of the Federal Reserve Board, Robert Heller. Heller said that disasters could be mitigated by “buying market averages in the futures market, thus stabilizing the market as a whole.” This appears to be the strategy that has been used.

Former-Clinton advisor, George Stephanopoulos, verified the existence of The Plunge Protection Team (as well as its methods) in an appearance on Good Morning America on Sept 17, 2000. Stephanopoulos said:
“Well, what I wanted to talk about for a few minutes is the various efforts that are going on in public and behind the scenes by the Fed and other government officials to guard against a free-fall in the markets….perhaps the most important the Fed in 1989 created what is called the Plunge Protection Team, which is the Federal Reserve, big major banks, representatives of the New York Stock Exchange and the other exchanges and they have been meeting informally so far, and they have a kind of an informal agreement among major banks to come in and start to buy stock if there appears to be a problem. They have in the past acted more formally… I don't know if you remember but in 1998, there was a crisis called the Long term Capital Crisis. It was a major currency trader and there was a global currency crisis. And they, with the guidance of the Fed, all of the banks got together when it started to collapse and propped up the currency markets. And, they have plans in place to consider that if the markets start to fall.”

Stephanopoulos' comments have never been officially denied. In fact, as Ambrose Evans-Pritchard of the U.K. Telegraph notes, Secretary of the Treasury, Hank Paulson has called for the PPT to meet with greater frequency and set up “a command centre at the US Treasury that will track global markets and serve as an operations base in the next crisis. The top brass will meet every six weeks, combining the heads of Treasury, Federal Reserve, Securities and Exchange Commission (SEC), and key exchanges”.
This suggests that the PPT may have been deeply involved in last Wednesday's “miraculous” stock market rebound from Tuesday's losses. There was no apparent reason for the market to suddenly “go positive” following a ruinous day that shook investor confidence around the world. The editors of the New York Times summarized the feelings of many market-watchers who were baffled by this odd recovery:
More importantly, outside intervention punishes the people who see the weaknesses in the stock market and have invested accordingly. Clearly, these people are being ripped off by the PPT's back-channel manipulations. They deserve to be fairly compensated for the risks they have taken.

Jun 30 11:36 AM

[alajac:]

Actually there was a whole bunch of Index PUTs that were expiring at the end of June, so there was a vested interest on the part of the people who had sold those puts to make them worthless pushing the Index price up a couple of bucks by buying stock and holding it for a few days. That pressure is done and so I believe we will go down for a while here.

Jul 01 09:26 AM