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Weekender: Sentiment Silliness AAII (American Association of Individual Investors) measures small investor sentiment like an oscillator.

A reading of 45% or higher indicates extreme bullish sentiment. At 25% or below you have the opposite, a bearish extreme. The long-run average is 39%.

As TPC reports, small investor sentiment recently went from extreme bear (21%) to near extreme bull (43.9%) in just two weeks. This suggests a few possiblities:

  • Small investors = headless chickens.
  • Mr. Market throws a wicked curveball.
  • Sentiment numbers are terminally squirrelly.
  • All of the above.

As TPC points out, when small investor sentiment topped out at 48.5% earlier this year, it came just days before a big market peak.

So what do you do with this recent surge? Do you fade it? Do you take it as a sign that markets could go higher? Do you wait out the spike to see if we plummet back to bearish before the month is out?

Or, my preferred option, maybe you recognize that the majority of sentiment poll data is just noise in the first place, and stick to your logic- and conviction-based trading plan.

To the links!

Market Pulse
  • Small Investor Bullish Sentiment Soars Near 2010 High (TPC). “Talk about a schizophrenic market.  Just two weeks ago the sky was falling.”
  • Bond Investors Whipsawed (WSJ). “As investors have piled into Treasury debt in recent months, skeptics have warned they were risking big losses if interest rates should jump higher suddenly.”
  • Dividends Beating Bond Yields by Most in 15 Years (BB). “More U.S. stocks are paying dividends that exceed bond yields than any time in at least 15 years as profits rise at the fastest pace in two decades.”
The Jobs Puzzle
  • Wall Street Firms to Cut 80,000 Jobs in 18 Months, Whitney Says (BB). “Securities firms around the world will cut as many as 80,000 jobs in the next 18 months as revenue growth begins to slow, said Meredith Whitney…”
  • Future hiring will mainly benefit the high-skilled (Yahoo). “Even when the job market picks up, many people will be left behind. The threat stems, in part, from the economy’s continuing shift from one driven by manufacturing to one fueled by service industries.”
  • Food Stamp Participation Climbs 10% (MoneyWatch). “Thirteen percent of the population, or more than one in eight people.”
  • Small businesses feel squeezed by Obama policies (WP). “As small businesses try to plot their recovery, attention is turning to what many owners consider burdensome policies — higher taxes, new accounting procedures and health-care mandates.”
Tightening the Belt
  • Cardholders Prefer Debit as Credit-Card Use Declines (BB). “Americans are shunning their credit cards and using debit to avoid incurring more debt, said Javelin Strategy & Research.”
  • Economy’s Silver Lining: A Happy Hour Boom (Yahoo). “The recession has caused significant damage to jobs and the stock market. But there’s one silver lining worth toasting: a surge in “happy hour” offerings for early-bird revelers.”
  • After Bargains of Recession, Air Fares Soar (NYT). “Air fares have marched steadily upward in recent months and are now close to pre-recession levels — and that’s not even counting all the fees that airlines have introduced lately.”

Macro View
  • Divided by a Two-Track Economy (WSJ). “While global players like industrial conglomerate 3M Co. and burger giant McDonald’s  Corp. are getting ever-bigger boosts… companies dependent on the U.S. market are hemmed in by recession-scarred consumers who are hesitant to spend.”
  • U.S. Trade Deficit Narrowed in July (NYT). “The United States trade deficit narrowed by 14 percent in July as exports by American companies rose by about $2.8 billion…”
  • U.S., U.K. Bond Yields Set to ‘Decline Massively’ (BB). “Interest rates cannot go up meaningfully for a very long time” in either country, the report said.”
  • U.K. Trade Gap Hits Record (WSJ). “The continued failure of U.K. exporters to take advantage of a much weaker pound makes it unlikely the economic recovery will be as strong as policy makers hope…”
  • Fed Banks Saw ‘Widespread Signs of a Deceleration’ (BB). “The Federal Reserve said the U.S. economy maintained its expansion while showing “widespread signs of a deceleration” in mid-July through the end of August, according to a survey by 12 regional Fed banks.”
Bummed Out Billionaires
  • Outlook Gloomy at Secret Billionaire Meeting (CNBC). “This year’s group, totaling fifty individuals and including more than 10 billionaires, was decidedly pessimistic on the U.S. economy, investment opportunities and the Obama administration.”
  • Paulson’s Biggest Hedge Fund Said to Lose 11 Percent This Year (BB). “John Paulson… lost 11 percent this year in his New York-based firm’s biggest hedge fund, according to a person briefed on the returns.”
Housing Hits the Banks
  • As Recovery Boosts Big Banks, Smaller Lenders Are Still Struggling (WSJ). “While large banks are showing signs of recovering from the financial crisis, many of the country’s small banks are still in big trouble.”
  • Homebuilders Revive Stalled U.S. Projects as Banks Unload Lots (BB). “Builders are buying lots at less than half their original prices from lenders eager to move distressed construction loans off their books.”
  • Sellers Cut Prices on 50% of Homes (housingwatch). “Homeowners are slashing prices more drastically and more frequently, according to recently released data from ZipRealty.”
The Stimulus Question
  • Dangerous Defeatism is taking hold among America’s economic elites (Telegraph). “Goldilocks has played a trick on America.”
  • Kohn: Fed must embark on new stimulus blitz (Telegraph). “The Federal Reserve must embark on a new blitz of measures should the recovery continue to make little dent in unemployment, a leading light at the central bank for the last four decades has said.”
  • Obama kicks off campaign with $50B infrastructure plan (Reuters). “President Barack Obama… proposed a six-year plan on Monday to rebuild aging roads, railways and runways with an initial $50 billion investment.”
China At Risk

  • Quantifying The Top 10 China Risks (ZRH). “We present the top 10 items that are of concern to investors in China, and are likely to provide even more ammunition to the ever increasing roster of China bears.”
  • U.S.-China Trade Tensions May Be Close to Boiling Over (WSJ). “U.S. lawmakers could soon replace feisty rhetoric with action on China and its currency policy.”
  • Strong yuan would hurt China (Reuters). “China must resist external pressure for yuan appreciation because a stronger exchange rate would take a big bite out of economic growth, according to a pair of senior government researchers.”
  • China $20 Billion Trade Surplus May Add Yuan Pressure (BB). “China posted a third straight trade surplus of more than $20 billion in August even as imports leaped, highlighting friction with the U.S. over claims that the nation’s currency is undervalued.”
  • Is China Actually Bankrupt? (MSN) “The nation has erected a complex system for magically making its debts disappear, but a look up China’s sleeve shows that its IOUs may equal its GDP.”
  • Japan alarm over China’s JGB purchases (FT). “China’s purchases of JGBs is an especially sensitive issue as it plays into anxieties in Japan about the strengthening yen and its impact on the economy.”
  • Xie: Empty Flats Spell Trouble (CIB). “Measuring the size of the property bubble in China by reference to the number of empty flats has become a hot topic of discussion.”
Emerging Consensus
  • Goldman Sees $80 Trillion Emerging-Nation Stock Market by 2030 (BB). “The market value of emerging-market stocks may surge more than fivefold to $80 trillion in two decades, overtaking developed nations, as China becomes the world’s largest stock market, Goldman Sachs Group Inc. said.”
  • Australia Gets Money, China Gets Australia (BBBW). “How’s that supposed to make a country feel?”
The Grain Drain
  • India Stuck With Glut of Grain (WSJ). “India’s monsoon season is nearing its end. The nation’s food problems are not.”
  • Sowing Seeds of Fear (WSJ). “With Russia playing an increasing role in the international food chain, the health of the new winter wheat crop is being watched by traders, food companies and aid agencies around the globe…”
Peak Oil On Hold
  • What peak oil? Why an oil glut is ahead (Fortune). “…the United States has more petroleum on hand today than it has had since at least the beginning of the first Gulf War.”
  • Gasoline Glut Rides Out Summer (WSJ). “U.S. gasoline stockpiles have defied gravity this summer, growing by an unprecedented amount at a time when inventories typically fall.”
  • Oil price surges after Midwest pipeline shuts down (Yahoo). “Oil prices surged Friday after a pipeline that delivered oil to Midwest refineries was shut down, raising questions about how long the supply may be disrupted.”
Forex Focus
  • Japan Has More Than Just a Yen Crisis (BBBW). “The currency crisis is merely one symptom of the country’s general aversion to change after the boom-and-bust 1980s.”
  • Germany adds to euro troubles (FT). “The euro hit record lows against the Swiss franc and the Australian dollar this week as worries over the health of the eurozone financial system resurfaced to undermine the single currency.
  • Aussie hits all-time high against euro (FT). “The Australian dollar climbed to a record high against the euro and a four-month peak against the US dollar as stronger-than-expected employment data lifted the currency.”
  • Japan Plans Intervention to Stem Rise in the Yen (NYT). “The Japanese government is gearing up to intervene in global currency markets to curb a strengthening yen, Prime Minister Naoto Kan said Friday…”
Greece, Germany and Trichet
  • Michael Lewis: Beware of Greeks Bearing Bonds (VF). “Greeks are sure of one thing: they can’t trust their fellow Greeks.”
  • Data Show German Economic Juggernaut Slowing (NYT). “A surprise fall in exports and near-zero growth in industry output in July suggested on Wednesday that the German industrial juggernaut may slow somewhat after building up record momentum earlier this year.”
  • Trichet calls for tougher euro rules (FT). “Eurozone members that break the region’s rules on public finances should be excluded temporarily from Europe’s political decision-making, the president of the European Central Bank has proposed.”
  • Trichet was ‘outraged’ by Slovakia’s loan refusal (FT). “… the ECB should not support euro entry to applicants that may behave similarly..”
Say What?
  • Highest Paid Athlete Hailed From Ancient Rome (Discovery). “Ultra millionaire sponsorship deals… are just peanuts compared to the personal fortune amassed by a second century A.D. Roman racer.”
  • New Zealand earthquake rips new fault line (Mail). “The earthquake that devastated a city in New Zealand tore open a new 11ft faultine in the Earth’s surface.”
  • As Stadiums Vanish, Their Debt Lives On (NYT). “How municipalities acquire so much debt on buildings that have been torn down or are underused illustrates the excesses of publicly financed stadiums and the almost mystical sway professional sports teams have over politicians, voters and fans.”
  • Bowerbirds trick mates with optical illusions (naturenews). “If elaborate decor fails to please her, perhaps she will fall for a trick used in châteaux gardens, Las Vegas casinos, and the Parthenon in Athens.”