Seeking Alpha

Chris Ciovacco's  Instablog

Chris Ciovacco
  • on Market Outlook
Send Message
Chris Ciovacco is the founder and CEO of Ciovacco Capital Management (CCM), an independent money management firm serving individual investors nationwide. The thoroughly researched and backtested CCM Market Model answers these important questions: (1) How much should we allocate to risk assets?,... More
My company:
Ciovacco Capital Management
My blog:
Short Takes - Ciovacco Capital
View Chris Ciovacco's Instablogs on:
  • Stocks Looking to Bounce
    See charts in this post for technical level to watch:  ciovaccocapital.com/wordpress/index.php/.../
    Tags: SPY
    Aug 03 11:30 AM | Link | Comment!
  • Bullish Sentiment Could Dampen Stock Rally - Study

    After the close on December 20 with the S&P 500 standing at 1,247, we performed an analysis which led to the conclusion bullish stock market sentiment was not a barrier to further stock gains. Since then, the S&P 500 has gained 3.12% and the Investors Intelligence Advisory Sentiment Bull/Bear Ratio has increased from 2.77 to 3.00. With valuations and market technicals currently stretched, it is a good time to revisit the possible role of sentiment in the weeks ahead.

    Stock market sentiment relative to a bullish or bearish outlook can be used as a contrary indicator for stock prices when it reaches extremes. We, like many familiar with the power of using sentiment, have been concerned in recent weeks as the percentage of bulls increased relative to the percentage of bears.

    The December 20 analysis used a chart supplied by Robert W. Colby (www.robertwcolby.com), author of The Encyclopedia of Technical Market Analysis. In this updated analysis, we added the green lines and blue arrows to Mr. Colby’s chart, which show periods where sentiment rose from depressed levels (blue arrows) to elevated levels similar to what we have today (top portion of green lines). The Bull/Bear ratio currently stands at 3.00 (see green arrow upper right). The Dow Jones Industrial Average (NYSEARCA:DIA) is shown at the bottom, below the blue arrows.

    Bull Bear Ratio Sentiment hits concerning levels Investors Intelligence

    Unlike the December 20 results, the stock market’s performance following the four similar periods between 2002 and 2011 is a mixed bag. We took Robert W. Colby’s chart (above) and calculated the market’s historical risk-reward profile for the cases highlighted with blue arrows and green lines from 2003, 2004, 2007 (two cases), and 2009.

    The table below shows the S&P 500’s performance between two weeks and six months after sentiment rose from very depressed levels to a bull/bear ratio of 3.00. Roughly 42% of the outcomes for stocks were favorable; roughly 28% were unfavorable (but not enough to warrant selling), and about 30% of the cases resulted in S&P 500 (NYSEARCA:SPY) losses of 3% or more.

    Bull Bear Ratio Sentiment hits concerning levels Investors Intelligence

    As investors, what we should care about is how the market behaved after similar circumstances in the past. We need to examine the magnitude and frequency of the bullish outcomes relative to the magnitude and frequency of the bearish outcomes to better understand the risk-reward profile of the current market as it relates to sentiment. The table below tells us the outlook, based on sentiment, for the next six months is unfavorable from a risk-reward perspective.

    Bullish Advisor Sentiment hits concerning levels Investors Intelligence

    In the cases studied, the two occurrences in 2007 are probably the least similar to the present day in terms of other factors, such as interest rate and market cycles. The cases in 2003 and 2009 are also not that similar to the present day since they occurred in the first year of new bull markets. The 2004 case, while far from a good match, aligns best with current circumstances. In 2004 after the Investors Intelligence Advisory Sentiment Bull/Bear Ratio hit 3.00, stocks basically tread water for three months, then experienced a decent pullback. From a risk-reward perspective, stocks were barely higher six months later.

    Used in isolation, sentiment can be a difficult timing tool, especially on the bullish end of the spectrum. As outlined on January 6, areas for a possible intermediate-term reversal include S&P 500 levels of 1,280, 1,283, 1,291, 1,298, 1,314, and 1,326. In a recent projection of the current market technicals, we guesstimated two time windows where stocks could run into some headwinds; 01/21/10 - 02/02/10, and 02/03/10 - 02/11/10.



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: Generally, I am long global stocks and commodities.
    Jan 14 9:00 AM | Link | Comment!
  • S&P 500 Eyes 1,313 and 1,326 in 2011

    While Monday’s ISM Manufacturing Index came in near expectations, it was the highest reading since May 2010. Production showed healthy gains moving from 55 to 60.7. New orders also gained 4.3 points moving to a bullish 60.9. Eleven of the eighteen industries reported growth. According to the ISM, December’s index level historically has been associated with real GDP growth of 5.0%.

    This morning’s Wall Street Journal summed up Monday’s trading this way:

    Fueling the gains were reports that factory activity ratcheted up world-wide, with the U.S., Europe’s major economies, Brazil and South Korea posting their best numbers in more than six months. Stocks in those markets all surged, while commodities raced higher on the accelerating global economic recovery. Copper reached a fresh all-time high.

    With some positive fundamentals in the hopper, it is a good time to look at where stocks (NYSEARCA:VOO) may be headed. In the U.S. on Monday, the S&P 500 futures closed above 1,256, making the 1,270 to 1,272 range the next short-term hurdle for stocks.

    The charts and table below help us determine reasonable upside targets given the current fundamental and technical state of the markets. The timing, in terms of when stocks might reach the next set of probable targets, is uncertain. The market could experience a corrective period prior to reaching 1,313 or 1,326. It may not hit 1,326 for several months, but the odds are good it will hit 1,326 sometime in the next six to nine months.

    The CCM Bull Market Sustainability Index (BMSI) closed Monday at 3,745, which from a historical perspective gives us a favorable risk-reward profile for stocks over the next two to twelve months (see table below). The term risk-reward speaks to the probabilistic nature of technical analysis and our market models.

    Bull Market Sustainability Index - BMSI - technical analysis blog

    The weekly chart below identifies possible areas where both short-term buyers (support) and short-term sellers (resistance) may become interested. These are not full-year 2011 targets; they represent the next logical milestones for stocks (NYSEARCA:SPY) given what we know today. Stocks could exceed these levels later in 2011.

    S&P 500 May Be Headed to 1,313 1,325 next 2011 - technical analysis blog

    The monthly chart below takes more noise out of the equation in the form of day-to-day volatility. The chart contains two parallel trend channels (A & B) that may influence the decisions of buyers and sellers later in 2011. It is probable sometime in 2011, possibly after some consolidation or corrective activity; the S&P 500 will fill the white space noted in the chart below. We cover similar concepts in our 2011 Stock Market Outlook, which was released in December 2010.

    Stock market monthly chart - technical analysis blog
     

    The CCM 80-20 Correction Index (80-20) is not flashing red at the moment. However, the 80-20 Index has entered the yellow zone telling us we need to be ready for some corrective activity sometime in the not-too-distant future.

    For readers who are understandably concerned about the elevated levels of bullish sentiment, this sentiment study is worth a scan. The current bull/bear ratio is 2.78 (the study was done at a ratio of 2.77). As we saw in 2010, we can expect periods of volatility over the coming months.



    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

    Additional disclosure: Generally, I am long global stocks and commodities.
    Jan 04 8:42 AM | Link | Comment!
Full index of posts »
Latest Followers

StockTalks

More »
Posts by Themes
Instablogs are Seeking Alpha's free blogging platform customized for finance, with instant set up and exposure to millions of readers interested in the financial markets. Publish your own instablog in minutes.