Sentiment Charts Reaching Blood In The Street Levels With SPY Down 11%

| About: SPDR S&P (SPY)

Summary

The time to buy stocks is when there is “blood in the streets”.

In late August through early September, my sentiment charts were screaming BUY.

This was a great time to buy for a tradable rally.

The S&P500 and SPY are 11% below their record highs.

Sentiment shows the amount of blood in the street is nearing the fall lows.

The time to buy stocks is when there is "blood in the streets" while others are fearful and selling. In late August through early September, my investor sentiment charts were screaming BUY and I added to many positions during this time. Since then, investor sentiment recovered quickly and I took some profits. Now I am:

  1. slowly buying again as sentiment is near the fall lows,
  2. SPY is again down double digits from its peak and
  3. the Russell 2000 index, down 22% from its peak value, is below its fall lows now in bear market territory.

Every week I review my sentiment charts of the weekly data. In this article, I compare the sentiment levels from various surveys in my table to get an idea of overall investor sentiment.

On Dec. 31, 2015 in end-of-year sentiment article, I wrote, "Charts 1a and 1b along with charts 3a and 3b below suggest some minor weakness during the early new year. This weakness could come if investors take profits in stocks like Microsoft (NASDAQ:MSFT) and Amazon.com (NASDAQ:AMZN) that were up a great deal in 2015 where they delayed taking profits to push the gains into the next tax year."

Last week, in "Weekly Sentiment Charts Falling with SPY Down 8%" I wrote, "Chart 3b, with a shorter time frame, shows the 4 week moving average rallied and "stabilized" and is currently heading lower. This suggests we may see another week or two of weakness before the rally resumes."

Today is certainly low enough for a tradable bottom and I have started buying again. The markets can still go lower. Buying at these sentiment levels during the last two bear markets over 50% required patience but during other declines, the rewards (profit taking opportunity) can much sooner, such as weeks or months. Just as I took profits after the last strong rally into the end of 2015, I will buy more if the markets go lower and stocks I like hit my predetermined buy levels, usually at strong support points at prices I like based on fundamentals.

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We have clearly seen "more weakness" as the S&P500 and SPY have fallen another 3.5% in just a week such that they are now down about 11.3% from their record highs.

Note how the Russell 2000 small cap index is 7.2% below its low of last year while the other indexes are still slightly above their lows.

After making his fortune buying during the panic after Napoleon's Battle of Waterloo, 18th century British nobleman and member of the Rothschild banking family, Baron Nathan Rothschild, is often credited for telling his clients that "The time to buy is when there's blood in the streets." (See "When There's Blood In The Streets")

I've explained in past articles such as "SPY 8% Off Record High While WLI Rises To 6-Week High" why I like as an investment for the long-term. I use fundamentals to pick individual stocks and SPY for my portfolio, but I seldom buy as they are making new 52-week highs. I try to buy when they are on sale and when the blood is running in the streets.

To get better prices, I start with my list of "Explore Portfolio" stock picks then wait for market pullbacks and extreme negative sentiment levels to buy if they haven't quite reached the "low ball" prices I set ahead of time to buy during market panics and other periods of market inefficiency. Said another way, I like to take profits as markets make new highs then buy back shares when my sentiment charts loudly shout at once "Buy" as most investors are afraid and selling.

On August 25, 2015, when the S&P500 made its closing low for the year, most of my sentiment indicators were at screaming buy levels not seen since the 21% bear market correction in 2011. Below is a market summary for the 8/25/15 closing prices showing four major indexes were down double digits from record highs.

Chart 1a: Put-to-Call Ratio - 10 & 66 day moving averages - 10-Years:

  1. Chart courtesy of Stockcharts.com
  2. Chart shows the ten day moving average, MA(10), of the Put-to-Call ratio was above its 1.25 peak value at the bottom of the 2011 mini bear market correction.

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If you have other favorite sentiment indicators you want tracked in my articles, then let me know in the comments and I will consider adding them to future articles.

What follows are the charts and brief explanations for the measures of sentiment I follow, in no particular order of importance.

Chart 1b: Put-to-Call Ratio - 10 day moving average - 3-Years

  1. chart courtesy of Stockcharts.com

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Chart 2a: AAII American Association of Individual Investors Sentiment Survey

  1. Numbers posted weekly here on Seeking Alpha
  2. From AAII Sentiment Indicator, "The sentiment survey, taken once a week on the AAII web site, measures the percentage of individual investors who take the survey who are bullish, neutral and bearish."
  3. Slower signals due to use of 4-week and 52-week moving averages

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Chart 2b: AAII American Association of Individual Investors Sentiment Survey

  1. Green curve shows a faster signal due to use of weekly data

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Chart 3a: II: Investor's Intelligence Survey

  1. From Investors' Intelligence Sentiment Indicator: The "Investors Intelligence Survey" or IIS questions stock-market newsletter writers once a week to see if they were bullish or bearish on the stock markets in the near-term. Newsletter writers have a large following as a group and are thus considered "market experts. "
  2. Investor's Intelligence web site
  3. Standard Bulls Minus Bears vs. the Dow Graph

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Chart 3b: II: Investor's Intelligence Survey

  1. In an attempt to account from those who are "neutral" this graph shows the percentage of bulls divided by the percentage of bulls plus bears.

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You can see why I use both charts.

  1. Chart 3a shows sentiment is above the low of last year while still below the lows of 2012 to 2015 before the decline last year.
  2. Chart 3b, with a shorter time frame, shows the 4 week moving average rallied and "stabilized" then reversed lower with sentiment nearly down to the multi-year "blood in the street" lows of last year.

Going back to 1998, we had tradable buying opportunities when sentiment dropped below 50%.

Chart 4: Ticker Sense Blogger Sentiment vs. S&P500

  1. From Ticker Sense Blogger Sentiment Poll: "The Ticker Sense Blogger Sentiment Poll is a survey of the web's most prominent investment bloggers, asking "What is your outlook on the S&P 500 for the next 30 days?" Conducted on a weekly basis, the poll is sent to participants each Thursday, and the results are released on Ticker Sense each Monday. The goal of this poll is to gain a consensus view on the market from the top investment bloggers -- a community that continues to grow as a valued source of investment insight. © Copyright 2015 Ticker Sense Blogger Sentiment Poll."
  2. WARNING: TickerSense did not post data for the two holiday weeks starting on Dec. 21 and Dec. 28 so I averaged the value for Dec 14 and Jan 4 to get those missing data points for my graph.

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Chart 5: NAAIM Exposure Index (1-week old data)

  1. From NAAIM Exposure Index - National Association of Active Investment Managers, "The NAAIM Exposure Index represents the average exposure to US Equity markets reported by our members."
  2. Screenshot courtesy of http://www.naaim.org/newsresources/naaim-exposure-index/

Chart 6: CNN Money Fear & Greed Index

  1. The CNN Money Fear & Greed Index is derived from seven indicators explained here
  2. Screenshot courtesy of http://money.cnn.com/data/fear-and-greed/
  3. Now below 20, blood is flowing!

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Chart 7: SPY Charts

  1. Top (black) is SPY adjusted for dividends
  2. Middle (green) is SPY prices not adjusted for dividends
  3. Bottom (orange) is the yield of the S&P500 which closely matches the yield of SPY less the small management fee.

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From charting sentiment for nearly 20 years, I've observed that major market (S&P500 or SPY) bottoms usually line up well with major spikes in the sentiment charts. The absolute levels are not as important as the relative levels of sentiment. For example, notice how the two biggest declines in SPY since the bottom in 2009 align with the two largest spikes in charts 1a and 1b above.

Notes

  1. I trade SPY around a core position in my newsletter's "Explore Portfolio" and with my personal account. With dividends reinvested, my explore portfolio holds 137.889 shares of SPY with a "break-even" price, after the 10/30/15 dividend, of $98.83. I also have the index fund version of SPY in both my newsletter's "core" portfolios.
  2. SPY is the exchange traded fund for the S&P 500 Index.
  3. VTI is Vanguard's "Total Stock Market" exchange traded fund. If you want to invest in a single fund, that is my first choice over SPY. I recommend SPY and several others in my core portfolios for more opportunities to rebalance.
  4. VOO is Vanguard's new exchange traded fund that tracks the S&P 500 Index. It is a lower cost alternative to SPY. I own and write about SPY, as I have many years of data for it, but VOO could do slightly better than SPY over time because it has a lower expense ratio.

Disclosure: I am long SPY and own the traditional index fund versions of VTI and VOO bought long ago in various taxable and tax deferred accounts. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclosure: I am/we are long SPY, MSFT.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.