With SPY At A Record High, Sentiment Is Sending A Mixed Message

| About: SPDR S&P (SPY)

Summary

In late August through early September 2015, my sentiment charts were screaming BUY.

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

Sentiment indicators in February again correctly indicated a tradable low and I added to positions.

SPY adjusted for dividends made a new record and I continue to take profits.

Sentiment charts are now “mixed” indicating roughly equal odds for up or down.

Currently, SPY adjusted for dividends is near a record high and sentiment suggests the rally can continue to a new record high.

Four weeks ago in, " SPY Found Support and Sentiment Fell Suggesting A Summer Rally To New Highs Is Now Possible " I wrote " With SPY down 3.5% from its recent all-time record intraday high, some short-term sentiment indicators are bearish enough now that a rally to new highs would not surprise me." While some charts show sentiment has improved, others show it remains quite negative.

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 of 2015, 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 in early 2016 with SPY and the S&P500 testing their 2015 lows while the Russell 2000 and Nasdaq went even lower. I added again to positions. Then as the markets and my stocks recovered, I took profits.

I continue to take profits as my stocks go higher and collect dividends so I have cash to put back into the markets when my stocks go down again and sentiment charts suggest it is time to buy again.

TABLE 1: Current Market Levels Compared with Benchmarks

On 2/11/16, on an intraday basis the S&P500 was down 14.4% from its record high. Currently, as of today's current price, the S&P500 is back to single digits, down only 0.9% from its record high close.

When you add it the 2.07% dividend for the S&P500, Chart 1 below shows you have made money even if you bought SPY at the absolute high over a year ago.

Chart 1: S&P500 Price & Yield ($SPX & !YLDSPX) with SPY Over Time Click to enlarge

On Feb. 11, 2016 in" With SPY Down 14% Again, Sentiment Charts Suggest Another Tradable Low" and SPY at $182.20 before adjusting for dividends, I wrote "now I believe we are in another good time to add to positions." I added to my positions during the decline. Here is my "Market Update" from that article showing all four major markets intraday were below the 8/25/15 low:

TABLE 2: Market Levels Compared with Benchmarks for the Feb. 11, 2016 Low

Today SPY adjusted for dividends was down 0.63% or $1.33 from its record intraday high of $212.52 on 6/8/16, yesterday. Notice on my chart that SPY traded halfway between its 50-day and 200-day moving averages, MA(50) and MA(200), on the chart below before turning higher.

This chart shows the S&P500 and SPY were down over 14% from their record intraday highs three times since last summer. All were great times to buy or add to your positions.

Chart 2: SPY Intraday Adjusted for Dividends Over Time

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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.")

For those looking for something more recent and true than the Rothschild story, on page 4 of his 2004 Chairman's letter Warren Buffet, who is probably one of the greatest investors of all time, wrote, "Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful."

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. Several of the stocks I bought during that time last year recovered and I took some profits as sentiment recovered. Now I am ready to buy again if the markets go lower to hit my buy zones with a further decline in sentiment or take more profits if the markets continue higher.

TABLE 3: Market Levels Compared with Benchmarks for the Aug. 25, 2015 Low

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.

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 3a: Put-to-Call Ratio - 10 & 66 day moving averages - 10-Years:

This 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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Chart courtesy of Stockcharts.com

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

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We saw a good spike in CPC sentiment with only a 4% correction in the S&P500. Last week I wrote, "Given CPC remains relatively high; this chart suggests the rally can continue to new highs before the next correction of 3 to 8%, but the odds are less than last week when CPC was higher." SPY adjusted for dividends made a new high and this graph is now closer to the last low than the last high. It is possible for CPC-MA(10) to keep falling to the 2014 low while the market rally continues but the odds now for a correction are about even with those for a continued rally based on this chart.

Chart 4a: AAII American Association of Individual Investors Sentiment Survey

These AAII numbers are posted weekly here on Seeking Alpha. 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."

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Chart 4b: AAII American Association of Individual Investors Sentiment Survey

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

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These AAII charts recovered from 5 weeks of more bears then bulls before last week (6/2/16) when there were slightly more bulls than bears. This week sentiment declined slightly to where the number of bulls is equal to the number of bears.

Chart 5a: II: Investor's Intelligence Survey: Standard Bulls Minus Bears vs. the Dow Graph:

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." See Investor's Intelligence website for more information.

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Chart 5b: II: Investor's Intelligence Survey

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Chart 5c: II: Investor's Intelligence Survey

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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Chart 6: Ticker Sense Blogger Sentiment vs. S&P500

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."

Click to enlarge Click to enlargeTicker Sense Blogger Sentiment continues to surge.

Chart 7: NAAIM Exposure Index

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." This screen shot is courtesy of NAAIM

NAAIM Notes:

NAAIM data is current through 6/8/16.

The green line shows the close of the S&P 500 Total Return Index on the survey date. The blue line depicts a two-week moving average of the NAAIM managers' responses.

NAAIM Disclaimer: "It is important to recognize that the NAAIM Exposure Index is not predictive in nature and is of little value in attempting to determine what the stock market will do in the future. The primary goal of most active managers is to manage the risk/reward relationship of the stock market and to stay in tune with what the market is doing at any given time. As the name indicates, the NAAIM Exposure Index provides insight into the actual adjustments active risk managers have made to client accounts over the past two weeks."

Chart 8: CNN Money Fear & Greed Index

The CNN Money Fear & Greed Index is derived from seven indicators explained here. This screen shot is courtesy of CNN

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

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Chart 9: Citigroup Panic/Euphoria Model

Today: 6/9/16: -0.36

Last week: 6/2/16: -0.36

From Citigroup's Panic - Euphoria Model where I show charts of the data back to 1987: "The panic/euphoria model is a gauge of investor sentiment. It identifies "Panic" and "Euphoria" levels which are statistically driven buy and sell signals for the broader market. Historically, a reading below panic supports a better than 95% likelihood that stock prices will be higher one year later, while euphoria levels generate a better than 70% probability of stock prices being lower one year later."

If anyone has access to the raw panic/euphoria data to draw charts back to 1987, then please contact me.

Chart 10: SPY Charts

The top (black) curve is SPY adjusted for dividends. The middle (green) curve is SPY prices not adjusted for dividends. The bottom (orange) curve 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:

I find it helpful to have two monitors so I can pull up my last article to compare the charts side-by-side.

Before last year's correction over 10%, corrections were generally 3% to 8% with pundits saying wait for a 10% pullback to get into the market. Over the past year we've had three market declines over 10% from the top, roughly 14% each, yet few of these pundits appear to have jumped on the bull train. The latest pullback of only 4.0% appears enough to have made several negative sentiment spikes that signal the markets can go higher before the next big pullback.

The charts in this week's update show the markets successfully tested the January 2016 and August 2015 intraday lows. On Feb. 11 in " With SPY Down 14% Again, Sentiment Charts Suggest Another Tradable Low" I wrote "This should be another great time to add to positions for a tradable rally." The markets bottomed and SPY rallied to a new high yesterday (6/8/16.)

Many of my sentiment indicators show bullishness has returned from the "fat-pitch lows" so I remain cautious in the short-term. In the longer term, bullishness is far below levels seen at major market tops. Some backing and filling, perhaps back to the 200- and 50-day moving averages for SPY (and many stocks I took profits in during March and April) would be bullish if it came with another nice decline in market sentiment."

Notes

I trade SPY around a core position in my newsletter's " Explore Portfolio" and with my personal account. With dividends reinvested, my newsletter's explore portfolio holds 139.648 shares of SPY with a "break-even" price, after the 4/29/16 dividend, of $97.72. I also have the index fund version of SPY in both my newsletter's "core" portfolios.

SPY is the exchange traded fund for the S&P 500 Index.

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 other ETFs (or their index fund equivalents at Vanguard and Fidelity) in my core portfolios for more opportunities to rebalance between these funds.

VOO is Vanguard's newer (than SPY) 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.