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INDEPENDENT Financial Advisor / Professional Investor- with over 30 years of navigating the Stock market's "fear and greed" cycles that challenge the average investor. Investment strategies that combine Theory, Practice and Experience to produce Portfolios focused on achieving positive... More
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  • S & P --- The December Lows & The "New" Sentiment  12 comments
    Feb 3, 2014 4:48 PM | about stocks: SPY, QQQ

    Last week I mentioned key support on the S & P @ 1770-1775

    with these comments:

    "The "line in the sand" sits right around the 1770 -1775 area on the S & P, and so far it has held."

    "However, a break below that support line and we could easily see a free fall to new lows.. So that fact shouldn't be ignored.. We have seen this type of sentiment before with the selloffs due to other "fear" based issues, so they shouldn't be underestimated."

    Well today we saw that the negative mindset that the market has taken on is still with us. The S & P broke thru the 1770 area and the sellers came in to make it a rout as the S & P settled down 40 points to 1741.

    Over the weekend , I started to put together more thoughts on the year end forecasts all have made , including myself . The conclusion that seems most logical to me at this point ;

    The markets stay in this negative and to some degree 'fear" mindset , some of the excesses are worked off, and this climate stays with us for a while, at least thru the second quarter and maybe the third...

    Some of the reasons for my new outlook.

    First, I read a report that money managers had their highest exposure to equities ,

    "By December 31, cash reserves in equity portfolios dropped to levels not seen in more than one year. The public fund managers wanted to "appear" as "wizards" and show their clients how they were "in" this market .. Neither public nor private fund managers wanted to be called out for having held high cash reserves in what had been an unrelenting bull run. "

    Of course when one runs with the "crowd' ,one usually gets run over.. going 'all In" was precisely the wrong thing to do and this is a great contrarian indicator. I have mentioned over & over here in this blog to trim positions, sell upside calls and raise cash as the market grinded higher.. Those that decided to be "all in" are now "stuck" and are left with limited options.

    Next, both the "January market barometer" and the failure for the S & P to now hold the December Lows in concert, have a remarkable record of calling for weakness ahead.. Many can refute or 'blow off" these type of indicators as "voodoo" ,but as I write this now, I am paying attention...

    For those not familiar with the Dec. Low barometer. It simply states that when the S & P closes below the previous Dec. Low in the first quarter of the new year -- there is trouble ahead..

    Since 1950 in the 31 instances where this has occurred , the Dow has only been positive 3 times in the short term - and the ensuing sell off's showed an average drop of 9% .... Now, it's way to early to forecast the lows , but keep in mind what I wrote on Jan 4th....

    "As I have mentioned in earlier commentary I believe the market will move higher ,, the question is exactly how we get to those new highs. From a technical viewpoint a retest of the S & P 1550- 1560 breakout area may well be in the cards as the adage of "what was resistance , now becomes support" is clearly shown here.. The 64,000 question is when.... From where we are now its a 15% correction.."

    Complete text and a chart showing the S & P is contained here :

    seekingalpha.com/instablog/706857-fear-a...-earnings

    Those are scary numbers but its not to suggest anyone run for the hills as that is what I would call my worst case scenario , but no need to panic , I take it one step at a time.. As I have circled many 'possible " support levels that may come into play in the near term... First area I noted is the 1700 - 1710 level, and as of this writing I believe that has a "decent" chance of holding..

    Combine these facts with the "mindset" that is in place, where all negative news is highlighted and the positives are shuffled under the rug, and we have the making of a corrective phase in the market.. This new sentiment that is upon us won't reverse quickly , thus my thoughts that we may see this prevail into the third quarter , that's my guess , who knows....

    Now, as we experience this weakness , all of the "issues" will be rolled out again, whether it be fed related, emerging market oriented, and last but not least , calling into question the entire recovery.. The cries will ramp up , creating more 'fear" .. and before one can blink an eye there will be talk of a "bear" market...

    The long term trends and the secular bull market is still in motion....yes, even with my worst case scenario of a 15% correction....

    In my view nothing has changed here, but Sentiment.. and when negative sentiment is combined with improving earnings ----

    Its NOISE.

    I suggest as I always have, that it's prudent to keep an eye on Earnings.. and so far they have been acceptable.. combined with many dividend increases and buybacks that were just announced. It's those companies that one should have on their radar screens....And as I just noted last week, the p.e ratio on the forward estimate ended the week at 14.88. Hardly bubble territory.. and once calmer heads prevail, we'll go higher..

    When the market sells off , they throw the 'baby out with the bathwater" ..... Many of those babies grow up to do quite well..

    Stay the course , if one has a diversified portfolio and raised cash along the way, this pullback is healthy and paves the way for higher prices down the road.

    Anyone with a LT slant will see that this period will present opportunities.. It always does ......

    Patience is required now ...S & P is severely oversold, and a bounce is expected, but I believe any rally attempts from here may be met with more selling pressure.

    Best of Luck to all...

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Comments (12)
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  • Great read F&G! Thanks for the heads up. XD
    3 Feb, 05:48 PM Reply Like
  • F&G, looks like people are rushing to cash out, in case it gets worse by Friday's jobs number. Now I'm expecting it might get worse, but in the long run as earnings come in the market will get stronger.

     

    We need some blow out earnings, and for more companies to say they expect to make money as the year progresses.

     

    These downturns provide good entry points to get into quality companies at lower prices.

     

    Volatility = opportunity ***and some pain!

     

    I'm saving some cash just in case Friday blows up.

     

    Hang on for the ride.
    3 Feb, 06:03 PM Reply Like
  • Author’s reply » Blue,

     

    i hear ya, but good news is being thrown away , so While I do agree we need the earnings growth to continue , i dont think it will help with the negative sentiment..

     

    Firday's report may also be affected by all of the bad weather , so im not too optimistic about seeing a good jobs number..
    3 Feb, 06:31 PM Reply Like
  • Since the beginning of last summer, I've been putting most of my new investment money in preferreds that were below par (and many of which are even more below par) and cefs that seemed to have been sold off too far.

     

    If your premise is correct, I should do better than last year as the preferreds and the defensive cefs should rise. If not, then I still get a pretty good yield.

     

    And on the other front, we've still got a way to go before vtsmx breaks below that 300 sma.
    3 Feb, 06:06 PM Reply Like
  • Author’s reply » User,,

     

    good move as i too switched a small portion some of my funds into preferred's

     

    agree, we have a long way to go before we get into any "bear" mentality
    3 Feb, 06:33 PM Reply Like
  • @ U7

     

    If SP gets down to 1650, will that be below 300sma? And what is sma? small, smooth, smiley, silly moving average? (VTSMX) is extremely broad, isn't it?
    3 Feb, 06:09 PM Reply Like
  • LMH,

     

    I should point out my previous comment was directed towards FG, not BSF (she types faster than I, apparently).

     

    VTSMX is different than the S&P. It also includes small and medium cap companies, but is heavily weighted in the S&P 500. They're correlated, but not 100%. I go with VTSMX because that's the first fund I ever owned and because theoretically it has all the US stocks.

     

    Thanks. Now you got me to thinking since I haven't looked at the info for awhile, so here's a link:

     

    http://bit.ly/LJ59d5

     

    It's sister etf: (VTI)
    3 Feb, 06:43 PM Reply Like
  • listening to Cramer…he's blaming the gov't shut down, fewer foodstamps, continuing sequester cuts, emerging markets crashing, commodities are in collapse, China is halting - not just a slow down, meaninglessness of earnings reports. Now Cramer claims he hasn't liked this market much ? wow.

     

    He says we should hunker down, pick at your favorite companies. Same as 2009…buy companies with hot earnings.

     

    Let's hope the gov't does some positive things instead of the usual malarkey they normally do.

     

    The way I look at it, this too shall pass.
    3 Feb, 06:10 PM Reply Like
  • Author’s reply » Blue,
    Cramer has to have something to fill his air time every day so It's a difficult chore.. He does seem to change direction like the wind,, But picking your favorites with good earnings is always good advice ..

     

    Yes this will eventually pass ...
    3 Feb, 06:36 PM Reply Like
  • Studies of Cramers show he's a good contrarian indicator. Not perfectly so. But googling for it showed some interesting results. I like his general "concept" advice. I can't even hear fast enough to have any idea what stocks he's recommending.
    3 Feb, 07:04 PM Reply Like
  • lol my tv went out again during Cramer's show so missed most of it.

     

    sometimes I watch him to get an idea of what not to buy…or if he's saying negative things about any of my stocks.

     

    hate how people watch his show & immediately buy whatever he's touting…or sell whatever he disses.

     

    he's too hyper for me, too - sometimes it actually rattles me to listen to him so I have to change the channel lol
    3 Feb, 07:26 PM Reply Like
  • Author’s reply » From LPL Financial

     

    It is not unusual to see the market dip 3% in a month, especially after such a strong run-up throughout 2013. We have seen 18 months of losses for the S&P 500 since the bull market began 59 months ago in March 2009—that is about one-third of the months. The average decline during those months was 3.1%. So January’s 3% stock market dip is not particularly unusual or alarming.
    4 Feb, 10:08 AM Reply Like
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