With SPY Down 14% Again, Sentiment Charts Suggest Another Tradable Low

| 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 2015, my sentiment charts were screaming BUY.

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

I took profits as the markets rallied through the end of 2015 and sentiment rose.

Many sentiment indicators are now close to the lows of last year.

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. I took profits as the market rose into the end of the year. The markets fell again with SPY and the S&P500 testing their 2015 lows while the Russell 2000 and Nasdaq went even lower.

This chart shows the S&P500 and SPY were down over 14% from their record intraday highs. It also shows SPY is testing the intraday lows and trying to make another bottom for a tradable rally.

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Currently, on an intraday basis the S&P500 is down 14.4% from its record high.

Note how the Russell 2000 small cap index is in a bear market, down 27% from its all-time high and 12% below its 8/25/15 low.

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.

After making his fortune buying during the panic that 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 SPY 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.

As I wrote in my Seeking Alpha articles, I used that period of weakness to add to positions then I took profits as the markets recovered in the end of 2015. Now I believe we are in another good time to add to positions.

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

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Chart 3c: 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.

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."

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The rally from the last time Ticker Sense bulls over bulls plus bears fell below 20 was short lived. This data usually comes out on Mondays so my guess is it will be below 20 again next week.

Chart 5: NAAIM Exposure Index

  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 NAAIM
  3. Note, NAAIM data is current through 2/10/16

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 CNN

  1. On 1/20/16 the low for this year was 9!

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.

Summary:

In my January 21, 2016 update, "Sentiment Charts Show Blood Flowing In The Street As SPY Was Down 14%," I wrote "The "doji" in the SPY chart for 1/20/16 often marks the bottom of a big decline. It also aligns with the maximum negative sentiment on the "Fear and Greed Index" in chart 6." The charts in this week's update show the markets are testing the January 2016 lows and the August 2015 intraday lows. This should be another great time to add to positions for a tradable rally.

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 138.64 shares of SPY with a "break-even" price, after the 1/29/16 dividend, of $98.30. 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.

Disclosure: I am/we are long SPY.

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.