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Market Update 8/25 - Market Psychology-Then & Now

Another week in the books. We finally saw our first 4 day decline in the markets this year. So far August has proved to be somewhat weak, but as we witnessed last week the buyers swooped in at the S & P 1640 level and moved the average higher now to retake its 50 Day MA.

As noted in earlier missives, its awfully tough to call corrections , market timing can be a 'fools' game at times.. When Ii receive e- mails for those that want to play the "all in" or all out" game i remind them of that fact.

I also have mentioned how this year may just play out to be another 1995 , where all pullbacks were shallow & contained. Its always difficult to compare market activity from two different eras but i went back in time to pull some facts to correlate the "psychology" that was prevalent then and its similarity to what I have heard this entire year.

Now if you think, well, 1995 was an ideal time - think again. The world today is like a walk thru Disney world compared to 1995.

Coming off the 1994 recession, people came into 1995 with depressed views of the markets and the economy . A jobless recovery was just about to get under way, and economists and journalists complained constantly that the stock market should not be advancing amid an economy that was struggling to create employment. Sound familiar !

Early in the year came the near collapse of the entire Mexican financial system, later known as the peso crisis. Timothy McVeigh blew up a federal building in Oklahoma City in April. The Bosnia War was being waged. By September, NATO was attacking the former Yugoslavia with forces from 15 countries. In November, a religious fanatic assassinated Israeli Prime Minister Yitzhak Rabin.

1995 was a tumultuous year to say the least. And yet the stock market kept rising in part because companies were improving their productivity with new enterprise software and keeping their labor expenses low by not hiring much. Sound Familiar !

Little did we know it at the time, but the Internet boom was just getting started. Corporate earnings were rising.

Economic growth was certainly slow in the first half of 1995, but got traction in the second half of the year and then the second half of the 1990s became legendary. But it all started with stocks sniffing out the success that lay ahead in the first half of 1995. And I now wonder whether it is possible the same investors instincts are collectively sniffing out an economic rebound in the second half of this year. Corporate earnings have risen, despite what the naysayers trumpet.

It's an 'eye opener" to revisit that timeframe, now we will see if history does repeat and set us up for further gains down this "long term" bull market road.

Now a few facts that may indeed support a short time upward bias to this market. Commentary gleaned from "Schaefer research".

Sentiment polls showed some amazing spikes in fear on a less-than-5% pullback. As contrarians, this is exactly what you want to see. It doesn't mean the market has to bottom here and now, but it increases the odds of a lasting rally once we get moving again.

First up, the American Association of Individual Investors (AAII) poll saw bears spike 52% in just one week, from 28.2% to 42.9% -- the most bears since April 18. The bulls dropped to 29% -- the lowest since mid-April. This is significant because mid-April was a time to be accumulating stocks right in front of the surprise May rally. Lastly, the bears have actually advanced for six consecutive weeks. This has never happened since the poll started back in 1987.

The Investors Intelligence poll saw those looking for a "correction" move over the critical 35% area to 35.1%. As you'd expect, when everyone (Including me) is looking for a pullback, the odds of it happening are slim. We've crossed this percentage line two other times this year, and both marked short-term buy signals.

Another poll reflecting a huge spike in worry was the National Association of Active Investment Managers (NAAIM) survey, which asks money managers to provide a number that represents their overall equity exposure as of Wednesday's close each week. The latest poll actually suffered its biggest drop since January 2008, falling from 69.85% clear down to 34.76%. This is near the June lows and presents a nice buying opportunity. The bottom line is: Active managers have plenty of cash to put to work , the question is when .

According to BofA-Merrill Lynch, just two weeks ago, we saw the largest outflow from U.S. equity mutual funds in over five years! Amazing what a small pullback and worry over "Fed tapering" can do to investors' psyche.

If that wasn't enough --- Goldman Sachs did a recent survey of over 708 hedge funds (with $1.5 trillion in assets) and found that less than 5% were beating the SPX as of mid-August. In fact, the average hedge fund was up just 4%, versus the SPX's gain of 20% at the time. Incredibly, one in four hedge funds is actually lower this year. This is rather bullish on a longer-term basis, as it suggests they'll be aggressively buying any pullbacks to play catch-up. We find this rather bullish on a longer-term basis, as it suggests they'll be aggressively buying any pullbacks to play catch-up.

As stated, last week the signals are surely mixed as there are still a few 'technical' issues that appear to be negative.

In summary, keep your powder dry , select your Favorite names , compete your due diligence and add when they hit your "buy" targets.

As an example i added a small position in JPM , this past week when it traded down to $50.60. It may get weaker with all of the "negative" news swirling about , but longer term its undervalued here and the Banks are entering the "sweet spot" for a major earnings uptick as rates slowly rise. Start looking at the beat up oil service sector names. (NYSE:RIG) ESV) represent real value here with great yields.

Disclosure: I am long JPM, ESV, RIG.

Additional disclosure: Full disclosure , I amm long numerous stock positions - al are listed here in my blog.. I am short Gold via DZZ