Need More Bullishness for a Correction

The market is continuing its stair-step higher, after some upbeat reports hit the wires past Friday morning.

First, FedEx (FDX), which is considered to be a good barometer for the overall economy, raised its earnings guidance and said it's seeing signs of improvement in the economy. Also, the Univ. of Michigan consumer sentiment survey rose to 70.2, up strongly from the 65.7 reading seen in August.

With signs of an improving economy, and positive signals coming from the daily action in the stock market, it is surprising to see so many large investors still so bearish. I recently stated that while many expected a pullback in September, if bearish sentiment spiked higher the way it did back in July, that would likely mean another shallow pullback at best. And that is exactly what transpired.

To wit, Friday's release from Greenwich Alternative Investments showed a huge increase in bearish sentiment among Macro Managers. Those managers that are bullish fell from 40% in August to just 13% in September, while bearish sentiment rose from 50% to 66%. Additionally, the AAII survey yesterday showed bulls dropped to 37%, while bears rose to 44%. I am surprised to see bears outnumber bulls at the same time the market is making new yearly highs.

Until we see a more pronounced rise in bullishness, I think that the pattern of shallow pullbacks will continue. The 10-year yield was down again Friday, to 3.29%. The persistent drop in yields is a bit concerning to me, and something to keep an eye on.

Trading comment: I am taking partial profits in some recent trades, WYNN and PAAS. Both have had nice bounces. These moves don't make me less bullish, I just want to be active in taking profits and trading around my positions.

Disclosure: Long PAAS, WYNN

Comments

[logicalthought:]

Despite the fact that I'm finally starting to "leg into" some short positions, I can't completely disagree with this, especially as the AAII poll data "scares me" (from a contrarian standpoint) a bit, too. However, despite the fact that a lot of folks remain bearish, very few of them remain short. Additionally, I found it interesting that on the Thursday night edition of "Fast Money", the universal consensus was that the S&P is now headed straight to 1100, and "the only question" is what happens then. It may be that talk like this, combined with the awful fundamentals and the fact that the bears have thrown in the towel on getting short because they've lost too much money doing it, may be enough to spell the end of this rally.

Sep 13 08:47 AM

[David Van K...:]

I don't put much stock in bullish/bearish sentiment indicators and their supposed contrarian-indicator qualities, because I have not seen a controlled, long-term study that supports that hypothesis. If anone knows of one, please point me to it.

However: It makes sense that if, as is often said, a bear market bottom cannot happen until there is "capitulation" as shown by the last bull throwing in the towel and selling out, then it stands to reason that a bull market top won't happen until there is capitulation by the bears. I suppose that would be demonstrated by their not only unwinding their short positios, but by their actually grittting their teeth and buying stocks.

Sep 13 10:43 AM

[adan:]

i mostly hear bullish sentiment on the financial mass media, cnbc, etc; the mention of fast money by logicalthought in the comment above is indicative -

and when i do hear anything remotely contrary to up up and away, it's about a "correction"

i dont know, but i wonder if the bond market is saying more than we can hear through the bullish din?

time, of course, will tell; caution and reasonable, for me, may be best either way, up or down, right now....

Sep 13 02:49 PM

[untrusting ...:]

What makes you assume that any bears are actually buying stocks? It has been pointed out that as much as 50-70% of the entire US market volume is simply ultra-ST trading by GS, JPM, HFT, algo trading, etc. Further evidence and articles point out that the holding periods of equities have dramatiacally dropped over the past few decades from on average over seven years to now less than seven months. Thus the evidence points out that the markets have simply become a ST trading vehicle or stated more simply a giant casino.

We personally know of no retail investors that are willing to invest in markets at this point. Trade/gamble, yes ... invest no. It does appear that the astute bears such as Kass, Grantham, etc were willing to buy back in March & April, but according to most of them they have taken significant profits at this point and are calling for market tops once again. There is little doubt that any type of LT valuation metrics show that the current market is significantly overvalued. If one believes the PE10 metrics, which have always been right before, then the market will yet again have at least one more serious sell-off and maybe more. Who knows when that will happen, but it almost certainly will happen ... the question is when. That is the gamble isn't it, and many retail investors are just not willing to take that gamble at this point, nor probably will they be until valuations indicate that the risk/reward is much more favorable.


On Sep 13 10:43 AM David Van Knapp wrote:

> I don't put much stock in bullish/bearish sentiment indicators and
> their supposed contrarian-indicator qualities, because I have not
> seen a controlled, long-term study that supports that hypothesis.
> If anone knows of one, please point me to it.
>
> However: It makes sense that if, as is often said, a bear market
> bottom cannot happen until there is "capitulation" as shown by the
> last bull throwing in the towel and selling out, then it stands to
> reason that a bull market top won't happen until there is capitulation
> by the bears. I suppose that would be demonstrated by their not only
> unwinding their short positios, but by their actually grittting their
> teeth and buying stocks.

Sep 13 03:27 PM

[Old Trader:]

"To wit, Friday's release from Greenwich Alternative Investments showed a huge increase in bearish sentiment among Macro Managers. Those managers that are bullish fell from 40% in August to just 13% in September, while bearish sentiment rose from 50% to 66%."

Could it be that the macro managers, by definition, focus on the "big picture", rather than zeroing in on any green shoots that may, or may not exist? If one steps back a bit, and looks at what's going on in various economies, ranging from China, where the possibilty of a new bubble(s) is/are forming, to Ukraine, where a finance minister is facing possible corruption charges related to currency dealings, according to the weekend issue of the FT., to Japan, where the economy seems to be sputtering in fits and starts, I don't find it overly surprising the macro sector is exercising extreme caution.

Sep 13 04:35 PM

[Andy1234:]

I think the market is going to pull back at some point in the near future. Alt-a and option ARM resets......and dollar strengthening since it seems everyone is betting on the dollar to go down. When people start stacking bets all in one direction......eventually it will get tired and fall out.

I suspect to see more bailouts/stimulous when the market pulls back again. I will buy more silver/gold/whatever is down (oil) when the market corrects.....and some riskier small caps which will probably get crushed.

They say the market is forward looking.....and has taken into account the option arms and Alt-A....but its different when they start hitting the market and the banks.

Sep 14 08:30 AM

[recession g...:]

yeah, i'm with you on this one, as is the research. check out solt and statman (1988, journal of portfolio mgmt) and clarke and statman (1998, financial analysts journal). basic take-away is that its a meaningless indicator that talking heads and investors use to reinforce their existing conceptions.


On Sep 13 10:43 AM David Van Knapp wrote:

> I don't put much stock in bullish/bearish sentiment indicators and
> their supposed contrarian-indicator qualities, because I have not
> seen a controlled, long-term study that supports that hypothesis.
> If anone knows of one, please point me to it.
>
> However: It makes sense that if, as is often said, a bear market
> bottom cannot happen until there is "capitulation" as shown by the
> last bull throwing in the towel and selling out, then it stands to
> reason that a bull market top won't happen until there is capitulation
> by the bears. I suppose that would be demonstrated by their not only
> unwinding their short positios, but by their actually grittting their
> teeth and buying stocks.

Sep 14 05:20 PM