Record Steel Sentiment Favors Bears

Includes: IJR, SH, SLX, SPY
by: Chris Ciovacco

Sentiment, especially when it reaches extremes, can be a good contrary indicator. A new record high in bullish sentiment qualifies as an extreme. According to Steel Market Update:

Steel Market Update (SMU) Steel Buyers Sentiment Index rose +9 points since the middle of December and is now at +41 the highest level recorded since the index began in November 2008. The previous high for our Index was +40 which was recorded the first week of April 2011. One year ago SMU Steel Buyers Sentiment Index was 16 points lower at +25.

The last record was made in early April 2011. How did the steel ETF (NYSEARCA:SLX) and S&P 500 (NYSEARCA:SPY) fare in the next six months? SLX was down 48% and SPY lost 15%. Extreme bullish steel sentiment aligns with our January 10 comments relative to possibly cutting back on our long positions (NYSEARCA:IJR) and considering the short side (NYSEARCA:SH) of the market.

Disclosure: I am long SH, IJR.