Market Sentiment Worse than Stock Performance?

A second week of declining markets has investors questioning whether stocks have come too far too fast. A week of disappointing economic reports has bears saying "I told you so." Is the rally over?

We look for clues in some of the charts that follow.

The view from Alert HQ --

Charts of some of the statistics we track at Alert HQ are presented below:


I look at this chart with mixed emotions. On the one hand, I am heartened that the number of stocks whose 20-DMA is over their 50-DMA (the magenta line) is holding up quite well despite two weeks of declines. On the other hand, with the significant drop in the number of stocks above their 50-DMA, I can't help but think that stocks will continue to drop until we see that magenta line dip more noticeably. After all, the odd situation where our magenta line stays up while the yellow line drops is the result of stocks falling precipitously and the fact that their moving averages now need to "catch up" with the recent moves.

The next chart provides our trending analysis. It looks at the number of stocks in strong up-trends or down-trends based on Aroon analysis.


Here again, I feel like the move isn't complete until the red line and the yellow line cross or at least touch. In other words, for this decline to play out fully and set up the next buying opportunity, we need to see still fewer stocks in up-trends and more stocks in down-trends.

Conclusion --

As things stand today, our statistics show stocks holding up better than can be expected after two weeks of selling.

But really, what should be expected?

The S&P 500 has fallen only 4.3% from it's recent high; not not a serious drop. Likewise, the NASDAQ 100 has only fallen 4.1%.

Sentiment, however, seems to have fallen off a cliff. After poor reports on employment from ADP, higher than expected weekly claims, a weaker Non-Farm Payrolls report, slumping consumer confidence, weaker than expected Chicago PMI and ISM Manufacturing reports, investors seem to have thrown in the towel.

So does one week of poor economic reports justify a bearish outlook and calls for a W-shaped recovery? It is unlikely that the economy will move up in a straight line just as it's unlikely stocks will move up in a straight line. Accordingly, it is premature to throw in the towel on this market.

This coming week has little in the way of economic reports but third quarter earnings will be due in a few weeks. As investors worry themselves this week with little data to chew on, stocks could continue to work their way lower. The charts above lead me to believe that the S&P 500 could easily fall below 1000 before a (hopefully) better than expected earnings season reignites the rally.

So if your outlook is short-term, watching support levels on the daily charts could easily push you into selling stocks very soon. If you have a little longer term outlook, look at the weekly charts. You will see that the upward-moving trend-line is still intact. So far, at least, there's no need to panic.

Comments

[aaavoid:]

Until we see SA posters all turn positive on the market, the only way is up. With all the dooms and glooms still preaching "the worst is yet to come" scenario, I believe the market will still be on the uptrend. Minor pullbacks will happen, but trend is still up. Until interest rates go up, stock market will have to keep going up against the plummetting dollar.

Oct 05 07:01 AM

[Michael Clark:]

The market seems to have topped. The Ultrashorts are turning positive, one-by-one. And stocks are failing to make new highs (failing the rest of overhead resistance) and breaking through old lows (failing through support levels).

seekingalpha.com/insta...

Is it the end of the world? No. But it looks like the Fed-funded straight up rally is not straight up any longer. which is a good sign. No rally, not even one funded b the Fed, should generate such weak selling in the face of such bad economic information.

Oct 05 08:37 AM

[David Van K...:]

Here's my theory on investor sentiment: You can do all the polling you want, and examine surveys like AAII's, and decide whether to be contrarian to the "dumb money" or not.

But in the end, investors vote with their dollars. So, just as technical analysts believe that price fully reflects the sum total of all the blended decisions of everybody currently investing, I think that price reflects investor sentiment...fully, comletely, and up to the minute.

Interpretations of trend lines depends on your time frame. I happen to work in a time frame that appears to be similar to the author's. So it looks to me like the upward trendline is still intact. And that it reflects investor sentiment at the moment.

Oct 05 09:08 AM

[Michael Clark:]

I agree with your theory on sentiment. Buying and selling IS sentiment. Everything else is derivative information, once- or twice-removed from the actual vote.

This term's sentiment is a bit clouded because of active government involvement in the rally. I've never seen a government so desperate to keep a rally going. If the rally does collapse here, it won't be because a politically-neutral government was merely standing on the sidelines. It remains to be seen if active government cheerleading and buying-of-first-resort will be bad for the integrity of stock and bond markets. Obviously, Bernanke seems to feel he has no choice but to re-fund the assset bubble. I guess it is not clear to him that prices go up and go down -- that that's the way the markets work.

It will be interesting to see what kind of events can affect the 'trend' when the trend is a friend of the federal reserve bankers who own a whole army of printing presses to create money and helicopters to distribute it.

Of course it is also clear to me that, after 20+ years of massive inflation, the fact that our leadership believes we need MORE INFLATION makes me wonder about the intelligence and the SANITY of our leaders.


On Oct 05 09:08 AM David Van Knapp wrote:

> Here's my theory on investor sentiment: You can do all the polling
> you want, and examine surveys like AAII's, and decide whether to
> be contrarian to the "dumb money" or not.
>
> But in the end, investors vote with their dollars. So, just as technical
> analysts believe that price fully reflects the sum total of all the
> blended decisions of everybody currently investing, I think that
> price reflects investor sentiment...fully, comletely, and up to the
> minute.
>
> Interpretations of trend lines depends on your time frame. I happen
> to work in a time frame that appears to be similar to the author's.
> So it looks to me like the upward trendline is still intact. And
> that it reflects investor sentiment at the moment.

Oct 05 09:34 AM

[Asbytec:]

It does seem the markets are chasing data. Good data, up...bad data, down. We get a green shoot and the market rallies a bit, like today expectations for data coming out today are high. Nothing wrong with that. But, stocks are climbing in sentiment (and insider trading, I guess.) Many folks want to believe it's over...and are driven by fear they will miss out on buying the bottom. In other words, a sucker rally...it's green shoots (carrot on a stick) giving us hope.

Mortgage back securities are no longer in vogue. The Fed (by March) and other investment firms are severely trimming their exposure to them. The housing bubble is over and about half a trillion dollars no longer exist. Housing prices may be affected adversely driving down consumer wealth effect. And wait until banks try to sell those unkept, repossessed homes. Good luck, it's neither a sellers or buyers market, and if mortgage rates fall. Good bye liquidity...

Unemployment, some reports say, will stay abnormally high for decades. Given the poor borrowing and lending sentiment, this might just be the case.

The dollar is tanking with inflation nowhere in the data, well, CPI, anyway. (I don't want to argue the CPI manipulation theory.) I fear the dollar may be losing it's anti market rally gains and loosing it's safe haven status. I might be premature, but it's a hunch investors might just be giving up on the dollar, regardless of what happens in the markets. Maybe this is the good news we have been waiting for: inflation may be just around the corner. This means the Fed will tighten a bit, which is good news (to me.) To be sure, gotta wait and see on this point.

The bottom line is, our economy is on life support and in a coma. I just do not see rallies with long legs until it is conscious and can breath on it's own. But, getting back to business as usual is highly unlikely for myriads of reasons: derivative money will be regulated and consumer buying will be at lower levels for a protracted period of time. Learning to walk again after brain damage, well, we might need a walker to limp along. This crisis really nailed us, and recovering will take a while.

Yes, we will have rallies and retractions. But with fundamentals out the window, investor sentiment chasing data coupled with the desire for this thing to end...don't let market rallies fool you. We are still in serious trouble. That's not just doom and gloom speak, it's just where we find ourselves...really.

To say otherwise makes one wonder if folks know the seriousness and depth of it all. Think about it, the government runs GM and fired it's CEO. The Fed has gone to extraordinary lengths to re-inflate and is loading it's balance sheets with underweight instruments of all sorts. Bank failures are expected to peak next year. Oil is reasonably priced, but doesn't seem to know which direction to go. (Is it stable?) It was nearly $150 and was projected (peak oil, remember that?) to be about $200. No wonder gold is around $1000...it's gotta be the safest thing right now. (And I am not a gold bug.)

Those an other actions speak to the seriousness and depth of our woes...our global deflationary problem. You can't run a global economy of recent years with all the money lost more recently. Who has got the money to fund buildings in Dubai these days?

Obviously my sentiment is low, but I am not alone. And I do not want to be a doom and gloomer. If you're a bull, good on ya. I realize I could be wrong and you be right. But based on what I see, the hunch in the gut...my sentiment...I am walking on egg shells.

Oct 05 01:25 PM

[Albertarocks:]

A report was printed in an independent British newspaper overnight stating that unidentified sources had said that Gulf Arab states were in secret talks with Russia, China, Japan and France to replace the dollar with a basket of currencies and gold for trading in oil within nine years. The effect on the dollar was pretty immediate and the price of gold had shot up to $1020 as I write this at midnight... even after a stellar performance during the North American session (or more politically correct western hemisphere session. South America counts too :-)

This can only serve to further seal the dollar's fate. If the dollar continues to tank, does that necessarily paint an inflationary picture immediately? I'd think it's pretty obviously inflationary over the long haul if the dollar continues to wither away into history, but I admit I don't know for sure if a sinking dollar over the next month or so would necessarily mean higher stock prices in October. We've seen periods in the past when the value of the dollar and the value of U.S. equities went in the same direction at the same time. In theory they go in generally opposite directions, and in reality for the most part, they have. I so curious to see if we're about to see one of those rarer times when the USD and U.S. equities fall together. I'm thinking its now more likely than not.

So this news out of England is kind of shocking on one hand, yet not the least bit surprising on the other. One thing is certain, gold is suddenly in real demand meaning that this recent run-up in gold isn't all about short covering... it's partially about real honest demand.

I also wonder if the IMF's announcement that they would be selling 403 tonnes of gold wasn't an effort (as I perhaps erroneously assumed initially) to drive the price of gold lower, but instead was a "forced sale", because they might have finally capitulated and accepted the fact that they may never again have an opportunity to cover their shorts so cheaply as at today's incredibly low gold prices. Whatever the case... there's something new in the wind.

Oct 06 01:16 AM

[Asbytec:]

Alberta Rocks, you may be right about the dollar. I hope you are right this is just a rare moment. My gut tells me something new is in the wind, too, though. Just don't know what it is or if the ole gut is right or wrong.

Oct 06 09:55 AM

[Albertarocks:]

On Oct 06 09:55 AM Asbytec wrote:

> Alberta Rocks, you may be right about the dollar. I hope you are
> right this is just a rare moment. My gut tells me something new is
> in the wind, too, though. Just don't know what it is or if the ole
> gut is right or wrong.

Asbytec, I'm certain now that there's a change in the wind, with last night's news that Australia became the first G-20 country to raise interest rates (1/4%). The talk on Canadian BBN is that there's a sense that the world might be giving up on the dollar and it appears they may be right. In Australia's case though, it's not necessarily a U.S. dollar issue, it's more about the relationship that Australia has with China (they do much more trade with China than with the USA).

In Canada's case, being the USA's largest trading partner (both ways), Canada is kind of caught between a rock and a hard place. The Loonie is surging and that's really hurting Canada's exports badly. And Canada in co-operation with the rest of the G-20 countries has agreed to hold interest rates down. With the CDN$ surging, there's no rush to make it any stronger by raising interest rates anyway. The problem though is that Canada may be facing inflationary forces to a certain extent if the CDN$ falls relative to the EURO and most other currencies, in their attempt to keep their currency from surging too far away from the USD$. In the event of inflation in Canada, they'd have to try to stem that by raising interest rates, further strengthening the CDN$, and further hurting their own economy. So Canada's kind of in a bit of a pickle in that regard, but otherwise pretty darned healthy.

I've heard of a possible respite (relatively short lived) for the USD because it might come back into demand if the world experiences deflation for a while, before the inevitable devaluation of the USD resumes its course. I'm not informed enough to know if this is true or not. Unfortunately, the long term future of the USD is already written, thanks to the FED, and it isn't a pretty picture.

Oct 06 11:50 AM

[Asbytec:]

Yea, I agree with you on Australia. They should actually be doing well, as indicated by the interest rate hike and China's demand for commodities. Plus, I don't believe they had much exposure to toxic debt. The Aussie Dollar has rallied big time.

As for the dollar, one would think deflation and some demand to close trade deals would support it. US lending is down and liquidity at lower levels. I just don't think the Fed can do much to stoke inflation, though they are trying hard. My curiosity lies in the dollar's weakness in some Asian emerging market currencies I deal with.

Oct 06 01:27 PM

[Albertarocks:]

On Oct 06 09:55 AM Asbytec wrote:

> Alberta Rocks, you may be right about the dollar. I hope you are
> right this is just a rare moment. My gut tells me something new is
> in the wind, too, though. Just don't know what it is or if the ole
> gut is right or wrong.

Asbytec, I clicked on your bio and see you're engaged in trading Asian currencies. Of course I don't know if you're using actual futures or some of the ETF's that are tied to those currencies, but my guess is that you know what the future holds for the USD. If you're an American, I'd say keep doing what you're doing (it'll probably save your future). Asian currencies that are doing the least amount of trade with the USA are probably the best ones I'd think, for the same reasons I mentioned in the last post about Canada's situation. But since you're already busy in that market, I'm sure you know a lot more about it than I do. I'd have to think gold is the purest currency on the planet so I'm long gold. The talk amongst the professional gold and silver bugs is that silver should outperform gold by a wide margin over the next few years until the gold ratio reaches a more normal level of 15 or 20:1. Can you imagine $100 silver?

Anyway, I find your field of interest to be very interesting for me as well, although I'm not currently invested in that arena. I have traded ERZ and ERC with a certain amount of success... but those things are scary as hell, much like futures.

I wish you the best of success with it.

Oct 06 01:48 PM