History Suggests Bears Are Too Confident

We have been watching with interest the speed with which market pundits/participants/punters have crossed the floor (from the bullish to bearish camp). Since the 1^st of June, just six weeks ago, the Dow World has fallen by some 7%, the CRB Index 10%, the USD Index +1.5% and US 10 year +1%.

These are not exactly big numbers. However, given how the crowd is reacting you would think that the Dow World had already fallen by at least 15% and the CRB by 20% over the last 6 weeks!

Below are the results with an accompanying explanation of the famous investment sentiment survey from AAII:

OK so what is the significance? Taking away the extremes that the sentiment survey got to over the last 10 months (where at the worst point in mid March the bullish percentage got down to just 20%), a bullish reading of 25% was about as bad as it got for the last 15 years.

Yes, even at the depths of the LTCM “crisis” of 1998 the bullish sentiment only got to a low of 24%!

My perspective is this: what if the Dow World falls by another 3% this week, taking it to a fall of 10% since the start of June, one would suspect that the bullish percent reading would fall by at least 3% taking it down to 25%. If the Dow World was to fall by 5% this week then we would likely see the bullish percentage fall to 20%!

In addition to this, a fall of 5% in the Dow World would probably push the 50 day moving average ratio of the NYSE to well below 20% which would indicate not just an oversold condition (which at 30% is currently what it is) to an extreme oversold condition!

It seems that the crash we had late last year and again in February and March is still too recent for investors and with any slight pull back in the market investors are adopting “here we go again” attitude. It probably does not help that we are now being reminded that the real damage of the 1929 crash was in the three years after 1929 not 1929 itself!

If history is anything to go by, yes there maybe some more downside over the coming days but odds favour it not being significant!

Disclosure: Long EEM, GWX, DBC

Comments

[Davewmart:]

It depends what bit of history you choose as your reference point.

Jul 13 06:27 AM

[Uppai Mappla:]

I think the results from Goldman Sachs and JP Morgan Chase might guide the sentiment towards financial institutions globally for the next few days.
I am no technical analyst but I have been long enough in the market to feel the vibes. I expect a short term bullish trend change (which may or may not continue) starting today.
I have already made significant purchases today in the Indian markets which has been falling for a few days now. Keeping fingers crossed for tomorrow.

Jul 13 07:00 AM

[Bruce Pile:]

The market could go a long way down in that trip from 27.91% bullish to the low 20s. On the 2nd chart, the % of stocks above their 50 dma, it's worth noting that each of those 3 moves up to new highs were trips by the market up to a declining 140 day EMA, where it turned back down each time. And each dip, although higher than the previous dip, was a new low for the market. So while it looks like we have just a short hop to go down to a bottom on the $NYA50R, that may be a long way in the S&P 500.

Jul 13 10:35 AM

[dcb:]

I am reporting him whenever I see him, and I hope that perhaps someone from california on seeking alpha may consider paying him a visit.

He is such an ass. You notice how he has tried to change his tune so people can't figure out it is him. before goldilocks, now no green shoots. The guy really has some sort of mental illness. I hope he is getting help, but his parents should take away his computer.


On Jul 13 09:36 AM YoYoMama wrote:

> Is anyone but me reporting Cetin? Please report this spammer. He's
> using several aliases these days.

Jul 13 10:47 AM

[dcb:]

if you look at the past five days or so you clearly have a flag pattern with susloping and down sloping lines. I'd advise not owning, but stay a bit above descending trend line. if there is break out you should benefit. But, I have also seen the boys break this line, put a short squeeze on and then sell into strength

Jul 13 10:50 AM

[Bruce Pile:]

As a PS to my above comment, the Jan '09 rally didn't quite make it to the 140 MA area, but it was a high point. The broad market just isn't making any new highs with those new % above 50 dma highs. Maybe the current decline will only be to around Dow 7700, which would be about a 50% retracement of the March/April rally, but then it would have to climb back to the 140 and this time do a convincing break of it to break out of the bear rally mode.

Jul 13 11:00 AM

[bartpr:]

forget these short term moves. concentrate on the fact that after every 45% or more decline in the last 100 years the market has recovered by 60% overe the 200 trading days from the bottom, if the mar low was the bottom for now. this by no means implies the market cannot retest the lows in years to come. dont forget the secular bear is alive.

Jul 13 06:49 PM