Sentiment Charts Reaching Blood In The Street Levels With SPY Down 11%

Summary

• The time to buy stocks is when there is “blood in the streets”.
• In late August through early September, my sentiment charts were screaming BUY.
• This was a great time to buy for a tradable rally.
• The S&P500 and SPY are 11% below their record highs.
• Sentiment shows the amount of blood in the street is nearing the fall lows.

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, my investor sentiment charts were screaming BUY and I added to many positions during this time. Since then, investor sentiment recovered quickly and I took some profits. Now I am:

1. slowly buying again as sentiment is near the fall lows,
2. SPY is again down double digits from its peak and
3. the Russell 2000 index, down 22% from its peak value, is below its fall lows now in bear market territory.

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.

On Dec. 31, 2015 in end-of-year sentiment article, I wrote, "Charts 1a and 1b along with charts 3a and 3b below suggest some minor weakness during the early new year. This weakness could come if investors take profits in stocks like Microsoft (MSFT) and Amazon.com (AMZN) that were up a great deal in 2015 where they delayed taking profits to push the gains into the next tax year."

Last week, in "Weekly Sentiment Charts Falling with SPY Down 8%" I wrote, "Chart 3b, with a shorter time frame, shows the 4 week moving average rallied and "stabilized" and is currently heading lower. This suggests we may see another week or two of weakness before the rally resumes."

Today is certainly low enough for a tradable bottom and I have started buying again. The markets can still go lower. Buying at these sentiment levels during the last two bear markets over 50% required patience but during other declines, the rewards (profit taking opportunity) can much sooner, such as weeks or months. Just as I took profits after the last strong rally into the end of 2015, I will buy more if the markets go lower and stocks I like hit my predetermined buy levels, usually at strong support points at prices I like based on fundamentals.

We have clearly seen "more weakness" as the S&P500 and NYSEARCA:SPY have fallen another 3.5% in just a week such that they are now down about 11.3% from their record highs.

Note how the Russell 2000 small cap index is 7.2% below its low of last year while the other indexes are still slightly above their lows.

After making his fortune buying during the panic 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")

I've explained in past articles such as "SPY 8% Off Record High While WLI Rises To 6-Week High" why I like 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.

Chart 1a: Put-to-Call Ratio - 10 & 66 day moving averages - 10-Years:

1. Chart courtesy of Stockcharts.com
2. 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.

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 1b: Put-to-Call Ratio - 10 day moving average - 3-Years

1. chart courtesy of Stockcharts.com

Chart 2a: AAII American Association of Individual Investors Sentiment Survey

1. Numbers posted weekly here on Seeking Alpha
2. 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."
3. Slower signals due to use of 4-week and 52-week moving averages

Chart 2b: AAII American Association of Individual Investors Sentiment Survey

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

Chart 3a: II: Investor's Intelligence Survey

1. 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. "
2. Investor's Intelligence web site
3. Standard Bulls Minus Bears vs. the Dow Graph

Chart 3b: II: Investor's Intelligence Survey

1. 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.

You can see why I use both charts.

1. Chart 3a shows sentiment is above the low of last year while still below the lows of 2012 to 2015 before the decline last year.
2. Chart 3b, with a shorter time frame, shows the 4 week moving average rallied and "stabilized" then reversed lower with sentiment nearly down to the multi-year "blood in the street" lows of last year.

Going back to 1998, we had tradable buying opportunities when sentiment dropped below 50%.

Chart 4: Ticker Sense Blogger Sentiment vs. S&P500

1. From Ticker Sense Blogger Sentiment Poll: "The Ticker Sense Blogger Sentiment Poll is a survey of the web's most prominent investment bloggers, asking "What is your outlook on the S&P 500 for the next 30 days?" Conducted on a weekly basis, the poll is sent to participants each Thursday, and the results are released on Ticker Sense each Monday. The goal of this poll is to gain a consensus view on the market from the top investment bloggers -- a community that continues to grow as a valued source of investment insight. © Copyright 2015 Ticker Sense Blogger Sentiment Poll."
2. WARNING: TickerSense did not post data for the two holiday weeks starting on Dec. 21 and Dec. 28 so I averaged the value for Dec 14 and Jan 4 to get those missing data points for my graph.

Chart 5: NAAIM Exposure Index (1-week old data)

1. From NAAIM Exposure Index - National Association of Active Investment Managers, "The NAAIM Exposure Index represents the average exposure to US Equity markets reported by our members."
2. Screenshot courtesy of http://www.naaim.org/newsresources/naaim-exposure-index/

Chart 6: CNN Money Fear & Greed Index

1. The CNN Money Fear & Greed Index is derived from seven indicators explained here
2. Screenshot courtesy of http://money.cnn.com/data/fear-and-greed/
3. Now below 20, blood is flowing!

Chart 7: SPY Charts

1. Top (black) is SPY adjusted for dividends
2. Middle (green) is SPY prices not adjusted for dividends
3. Bottom (orange) is the yield of the S&P500 which closely matches the yield of SPY less the small management fee.

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.

Notes

1. I trade SPY around a core position in my newsletter's "Explore Portfolio" and with my personal account. With dividends reinvested, my explore portfolio holds 137.889 shares of SPY with a "break-even" price, after the 10/30/15 dividend, of $98.83. I also have the index fund version of SPY in both my newsletter's "core" portfolios.
2. SPY is the exchange traded fund for the S&P 500 Index.
3. 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 others in my core portfolios for more opportunities to rebalance.
4. VOO is Vanguard's new 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. 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.

Analyst’s Disclosure: I am/we are long SPY, MSFT. 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.

Comments

[Kirk Lindstrom]

OK, I was able to get a good image of the headline "Silicon Valley stalwarts such as Intel, Google, Facebook at center stage of markets’ collapse"
and posted it here in the comments to today's market update at http://on.fb.me/1J96LcI

[Kirk Lindstrom]

OK, I was able to get a good image of the headline and posted it here in the comments to today's market update
http://on.fb.me/1J96LcI

[Kirk Lindstrom]

Today's headline in the San Jose Mercury News, paper for the Silicon Valley, was about the market "collapse." I'll have to save a copy for my records and perhaps for the next update of this article.

Next week I work on my newsletter so it might be two weeks until I can update the charts again here.

[Illuminati Investments]

I've been positioning myself for this pullback for awhile but find myself chickening out even though we're down over 10%.

Probably a sign that this might be a bottom, so did a little nibbling here but saving some dry powder in case we keep going down to 20%.

[frank paxman]

Illuminati -- Understandable position considering current sentiment. The technical gurus keep calling for lower levels, the fundamentalists say downside sentiment is overdone. It required great restraint on my part to not buy today. I decided that sentiment is so negative going into a three-day weekend, I'll wait to see what happens when the market opens on Tuesday.

[Gio Graves]

Yeah, the hesitation is a "back to back" 10% correction. Whats the point of a correction if we retrace those gains weeks later? We are rolling over and losing even more leaders this time around. 20% is in the cards, but we have probably hit a short term tradable bottom. We are very oversold here.

[frank paxman]

Gio -- That's an accurate and succinct assessment, for sure. Part of the hesitation is knowing that the market is quite the drama queen -- in this case oversold but no telling where the drama's next page will turn.

[Kirk Lindstrom]

The "Fear and Greed Index" just hit single digits... 9
http://cnnmon.ie/QxDqZ3

[gardencove]

See no blood yet either.

[Kirk Lindstrom]

There is blood... the debate is if it is a single flesh wound or the blood from the Third Battle of Changsha.

[psumba]

That's not blood in the streets ... it's ketchup! You need a sense of history to really know the difference.

[Kirk Lindstrom]

I'm curious why you would imply I have no sense of history?

I recall making a great deal of money using cash to buy after the 1987 crash, after the 2000-2002 bear market and again after the 2008-2009 bear market. In 2001 my newsletter portfolio actually had a positive return from buying the big declines and taking profits in the rallies.

The perma bears have said for decades we don't have blood in the street and it was a lousy time to buy and they've been wrong for decades. I hope you are not in that camp and were just trying to be clever.

[Hilljak]

Amen

[psumba]

I remember '73 & '74 too well. That was blood in the streets! If the Fed and US Gov't hadn't responded to 2008-9 with MASSIVE stimulative debt, the economy and market would have looked more like those years or worse.

The problem is that we can't use that trick again. Looking at the worldwide decline in manufacturing commodity prices (steel, aluminum, etc.), we appear to be entering a downturn without unwinding the debt still on the books from the last time.

I'm not an active trader, but a long-term investor. I got out before the top, and will re-enter around the bottom. That worked well in 2007-9. The money that I am investing is my "need to be safe money" that I am willing to sacrifice return in exchange for safety. While I won't be lighting my cigars with $100 bills, I want someone else's blood to be on the street.

[Tiki Bar Capital]

Excellent sentiment analysis. The one thing that's been odd is that we haven't seen the VIX hit higher levels. Investor complacency? Or perhaps the Street doesn't really believe this correction is a long term phenomenon.

[NYer1]

Tiki
Perhaps it shows this move lower has a long way to go..
I would start to be worried about short positions when I see VIX above 45-50

[Kirk Lindstrom]

Thanks for the kind words Tiki.

I know many who do well selling options (buying them is a losing proposition for most...) but......

I've not been a fan of using puts and calls because they can tie up your capital and it is possible you don't get the stocks or SPY ETF if it briefly trades below your strike price in a "flash crash" type event.

OTOH, I got some Intel shares for my IRA at $25.00 last year during the intraday panic selloff on 8/24/15. My guess is someone holding a put option to sell me Intel at $25.00 probably would not have exercised that option because that was very close to the low for the day and they would be smarter to hold for perhaps a lower price. BTW, I sold 2/3rds of those $25 Intel shares at $34.87 two months later....

I've sold options in the past and was not happy I had my capital tied up until expiration or I was hostage to the whim of the buyer to exercise at the worst time for me. Since I know many who do well selling options, my guess it is a matter of taste for what works best for different people.

Thanks again!

[Kirk Lindstrom]

Yes, I think you may be right. When examining the data last night after the close, I found two other periods during the past 16 years that got to this level and where buying then required "patience" of up to 2 years to redeem a reward. Those where the last two bear markets over 50%. It is why I wrote I had STARTED to put some back in. I ended the year with the highest cash/fixed position as a percentage for my newsletter and personal IRA trading accounts. I've STARTED to put some back in but I am in no big hurry... If I miss a "V-bottom" then what is in should make me happy enough.

[Keith Investor]

One important aspect missed in the discussion of SPY vs VOO or VTI is the ability to use options efficiently on SPY. Namely my strategy is to sell puts on SPY at my desired enter prices and get paid to do so.

[brainleft]

I just deployed capital since "the word on the street" the financial world is ending! I love being contrarian, suits me fine. I appreciate the articles Mr. Kirk, thank you!

[Kirk Lindstrom]

Thanks for the thanks.
>> I appreciate the articles Mr. Kirk, thank you!

Here is a new way to look at the data "AAII Despondent Sentiment" from Schaeffer http://bit.ly/1TZcjH6

"The four-week moving average of neutral and bearish respondents hit 77%, which tied with the week of March 12, 2009 -- coinciding with the post-financial-crisis bottom, just before stocks went on a long-term run higher. Prior to that, you'd have to go back to February 2003 (also 77%), Prybal said. The all-time high of this moving average occurred in the late 1980s/early 1990s, right around 80%."

Quote from http://bit.ly/1TZclis

[MisterJ]

Finally! Three almost identical lows within a few months... enough of volatility.

[Kirk Lindstrom]

I agree! I try to remain calm and ask myself "what would Yoda say" during times like this.

"To your favor embrace volatility and use it. Herh herh herh."

[Stock Reversals]

Obviously