Did Today's SPY Decline Trigger A Sentiment Buy Signal?

| About: SPDR S&P (SPY)

Summary

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

I bought then 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.

I took profits as SPY and many of my stocks rallied to new record highs.

Today SPY is testing its September low about 3% off its record high.

Currently, SPY adjusted for dividends is up 5.95% YTD and is only 2.65% below its record high intraday price.

Chart 2 below shows that today SPY tested and slightly penetrated its September low then reversed to where it stands now at $212.71.

SPY Dividend History

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.

I was asked by many to write less and get to the charts that follow so if you want to read more about each of these charts, then read my February 11, 2016 article" With SPY Down 14% Again, Sentiment Charts Suggest Another Tradable Low." That article shows what my charts were like when I wrote "now I believe we are in another good time to add to positions."

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. Today it is up 16.5% from that low, thus the period around 2/11/16 was a great time to buy! Those of us who bought small cap stocks found in the Russell 2000 index during the periods of market weakness saw even greater rewards as that index is now up 27.8% since 2/11/16.

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

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

Chart 2 below shows the S&P500 and SPY were down over 14% from their record intraday highs three times since the summer of 2015. All were great times to buy or add to your positions. Pullbacks between 3% and 14% can also be good times to buy back shares if you use sentiment charts to help identify a turn in the markets.

Notice Chart 2 also shows that SPY traded down and slightly penetrated its 200-day moving average, MA(200), in June 2016 before reversing to make a new intraday high in August. Since then, SPY has pulled back over 3% twice with today looking like a test of last month's decline.

Chart 2: SPY Intraday Adjusted for Dividends Over Time

Click to enlarge

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.

Click to enlargeChart courtesy of Stockcharts.com

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

Click to enlarge

Today the 10-DMA (ten day moving average) in these CPC charts is approaching the level seen at last month's low. With the market down today, CPC-10 should be even higher after today's close.

The bears will say yet again that this is one more chance to get out now near record highs before the market collapses. They sure must get hoarse from this warning.

Personally, I rebalance or take profits near market highs so I have cash to buy potential future large declines. If the markets continue higher and never return, then I spend some of the cash and take more profits.

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."

Click to enlarge

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

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

Click to enlarge

These AAII sentiment charts show the 52-week moving average of the percentage of bulls minus the percentage of bears remains in the rare negative zone for the 36th consecutive week. Also, the weekly data and 10-week moving average are also now in the negative zone. This is certainly not the level of bullishness one would expect at a major market top.

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 web site for more information.

Click to enlarge

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.

Click to enlarge

These Investor's Intelligence (II) sentiment charts show quite a bit of bullishness. Newsletter writers come and go with the successful ones lasting decades while the failures fade away. My guess is these II charts show significant "survivor bias" which is why the absolute levels to me are not nearly as important as quick changes.

Chart 6: CNN Fear & Greed Index Charts

From CNN Click to enlarge

Chart 7: 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.

Click to enlarge

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.

Timer Digest update:

Timer Digest, TD, monitors over 100 of the leading market timing models, ranking the top stock, bond, and gold timing according to the performance of their recommendations over various periods of time. Timer Digest profiles many of the top investment and financial newsletter writers, including discussions of their timing models.

I often get confirmation of "blood in the street" when 50 to 100% of the short term leaders are bearish as it indicates the long-term bears were finally right after a good sized decline.

Excerpt from the TD Hotline dated 10/12/16 about the top ten short-term timers: The "Top Ten Consensus" is now bearish with 4 Bulls and 6 Bears. Shortly after SPY's 9/12/16 intraday low, the 9/14/16 TD Hotline showed 5 bulls and 5 bears and the 9/17/16 monthly TD issue recovered to 6 Bulls and 4 Bears.

The latest monthly TD newsletter dated 10/10/16 covers its "Top 10 Long-term Timers" where "Kirk Lindstrom's Investment Newsletter" is tied for 4th place for long-term market timers. One is neutral while the remaining 9 of the top 10 were bullish. I was last featured in this article" Timer Digest Features Kirk Lindstrom's Investment Letter on Cover."

Summary:

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

Short-term it appears to be the start of a successful test of support for SPY, we could rally to a new record high as many indicators are now where they were when the market was last down 3.3% from its record high with the TD consensus now bearish where it was only neutral during the last decline over 3%.

Most of my sentiment indicators show bullishness is still well above "fat-pitch lows" so I remain cautious in the medium-term.

In the longer term, bullishness is far below levels seen at major market tops. Some backing and filling, perhaps back to the 200-day moving averages again for SPY (and many stocks I took profits in since then) would be bullish if it came with an even larger decline in market sentiment.

Sentiment charts are not perfect."All or nothing Market timing" seems foolish to me. If you have nothing in the markets, these pullbacks may be your only opportunity before the markets reverse to new highs. Likewise, even if you are extremely bullish for the future, I feel it is always wise to have some cash for the three extraordinary buying opportunities like we saw during the past year when the market was down over 14%.

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 139.468 shares of SPY with a "break-even" price, after the 7/29/16 dividend, of $97.23. 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.