The higher prices go, the more optimistic investors feel. Actually, this is the rule, not the exception. As the late Ian Notely liked to say,
“When prices are high, they rush to buy.
But when prices are low, they let them go.”
The Art of Contrary Thinking calls for questioning high and rising optimism. Investor sentiment data indicated high degrees of optimism and bullish complacency in recent weeks, matching or exceeding extremes in September, 2012, when many stock price indexes hit peaks and reversed to the downside. Elevated levels of optimism are bearish because when the majority is extremely bullish, investors are already fully invested in the market. Once everyone who is going to buy has already bought, stocks are vulnerable to a downside shakeout. The pendulum of emotion tends to swing too far in one direction, but the market mood always reverts to the mean–eventually. Sentiment extremes are a leading indicator of price.
The S&P 500 (SPX: 1,513.17) rose 0.68% last week to its highest level in 5 years. That higher closing price high was confirmed by most price indexes and breadth indicators. It is obvious. Anyone can see that the stock market price trend is pointing up.
Under the surface, however, not all stock market indicators are making higher highs. Specifically, a wide variety of momentum indicators are lagging price. That is a problem, because momentum is a leading indicator of price.
Most price momentum oscillators did not make new highs, suggesting continuing momentum divergence. For example, popular daily momentum oscillators such as RSI(14) and MACD(12,26,9) did not rise to higher highs on Friday to confirm S&P 500 price, actually appear to be losing bullish momentum in recent days, and remain modestly below their 2011-2012 highs.
On-Balance Volume did not rise to a higher high on Friday to confirm price.
Based on the Coppock Curve, the S&P 500 price momentum bearish divergence is evident in multiple time frames: monthly, weekly, and daily. Clearly, the Coppock Curve is not making new highs and is lagging price.
The Cumulative Daily Advancing-Declining Volume Line rose moderately above its 2011 highs, but various momentum indicators based on this volume data did not confirm by making higher highs.
The percentage of stocks in the S&P 500 Composite Price Index above their own 200-day SMAs rose only slightly last week but is still below previous highs in 2012 and 2011, indicating diminishing upside momentum for the uptrend that started nearly 4 years ago.
The percentage of S&P 500 stocks that are in Bullish Point-and-Figure Chart uptrends rose slightly last week and is now above 82%, up from 58% in November, but still down from a peaks at 85% in February, 2012, and 89% in February, 2011. The Bullish Percentage is not confirming higher highs in the S&P 500 Composite Price Index.
Net New Highs on the NYSE (Daily New Highs minus Daily NYSE Daily New Lows) rose to 426 on Friday. That is a strong number, but it is below the number in January and September. With price indexes at new highs, the number of stocks making new highs also should be rising.
Fundamentally, stocks are richly valued by long-term historical standards. The S&P 500 were recently priced at 21 times average earnings for the past 10 years, which was 40% above the median of 15 times average earnings since 1900, according to Yale finance professor Robert Shiller. In addition, the dividend yield on the S&P 500 was only 2.4%, which was 41% below the long-term median of 4.1%.
Our clients’ separately managed accounts made gains in 6 of the past 7 consecutive quarters; see:
Robert W. Colby Asset Management, Inc. (click here).
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Sentiment for Contrary Thinking
Investor sentiment data indicates high degrees of optimism and bullish complacency, matching extremes in September, 2012, when many stock price indexes hit a peak and reversed to the downside. Elevated levels of optimism are bearish because when the majority is extremely bullish, investors are already fully invested in the market. Once everyone who is going to buy has already bought, stocks are vulnerable to a downside shakeout. The pendulum of emotion tends to swing too far in one direction, but the market mood always reverts to the mean.
The CFTC’s Commitments of Traders report for stock indexes showed smart professionals selling heavily to dumb speculators. Large commercial hedging firms enjoy an enormous inside informational advantage over speculators, who are usually wrong at major market turning points, according to Steve Briese, bullishreview.com. The current maximum bearish reading indicates that a major top is brewing and next move should be down big, possibly to SPX 1074.77, the low of 10/4/2011.
Large speculators held a record net-long position in futures and options contracts on the NASDAQ 100, according to the CFTC’s Commitment of Traders report. Large Speculators, which are mainly hedge funds, are trend-followers, and their aggregate position usually becomes extreme near market reversals.
Small traders just moved to their largest net-long position since the stock market highs in May, 2011, according to The Elliott Wave Financial Forecast.
Commercials hold their largest net-short position in 3.5 years, according to The Elliott Wave Financial Forecast.
SentimentTrader.com noted that 67% of the “dumb money” was bullish, compared to 29% of the “smart money”. At such readings in the past, the stock market suffered a 3% to 8% downside correction spread out over a few weeks.
Put/Call Ratios signal a bearish turning point. The CBOE Equity Put/Call Ratio (which includes only options traded on individual stocks, while excluding options on indexes) fell to 53 on 1/3/13. This matched the 53 reading at the S&P 500 peak on 9/14/12, which was immediately followed by a 9% downside shakeout.
Market Vane’s Bullish Consensus survey shows extreme optimism. The percentage of stock market bulls surged to 70% recently, the highest since June 2007.
AAII Sentiment shows that individual investors are extremely bullish. As of 1/24/13, there were 52.34% bulls, 23.39% neutral, and 24.27% bears. This is the highest percentage of bulls in more than 2 years, since 1/13/11.
Investors Intelligence Sentiment confirms that stock market newsletter advisors are extremely bullish. With 54.3% Bulls versus only 22.3% Bears as of 1/30/13, advisors are more bullish than they were at the stock market top in September, 2012, just before a 9% downside correction into November.
Hulbert Nasdaq Sentiment is at extremes. The current reading of 81.3 as of 1/24/13 is at its best levels in years and is up a low of -39 in November, 2012.
Corporate insiders are extremely bearish. Insiders sold 6.67 shares for each share bought in December 2012–up from 1.54-to-1 in November 2012, and up from a 20-year average of 3.41-to-1. This data is compiled by Vickers Weekly Insider Report, published by Argus Research. Reporting for MarketWatch.com, Mark Hulbert wrote, “The picture the data paint is unmistakably bearish.”
NYSE Margin Debt rose for the fifth consecutive month to $331 billion, the highest level since February 2008. Stocks may be vulnerable to forced selling if stock prices turn down.
Short interest in stocks listed on NYSE and Nasdaq both fell 5%, to 12.9 billion and 7.2 billion, respectively, in December. A decline in short interest means less potential demand for stocks from short covering.
Investors are all in, fully invested. The current reading of 104% long is the most bullish sentiment since the beginning of the survey in 2006 by the National Association of Active Investment Managers.
VIX Fear Index collapsed to 12.29 on 1/18/13, its lowest level in 5 years, indicating a remarkable level of bullish complacency. VIX is a market estimate of expected constant 30-day volatility, calculated by weighting S&P 500 Index CBOE option bid/ask quotes spanning a wide range of strike prices for the two nearest expiration dates.
The S&P 500 Composite Potential Resistance
1576.09, high of 10/11/2007
1552.76, high of 10/31/2007
1523.57, high of 12/11/2007
The S&P 500 Composite Potential Support
1496.33, low of 1/28/13
1489.46, low of 1/24/13
1474.51, high of 9/14/2012
1463.76, low of 1/15/13
1451.64, low on 1/8/13
1448.00, high of 12/19/2012
1445.65, 50-day SMA
1440.24, high of 5/19/2008
1439.15, high of 9/12/2012
1438.59, high of 12/12/2012
1434.27, high of 11/2/2012
1432.82, low of 12/20/2012
1430.53, low of 9/26/2012
1426.76, low of 12/12/2012
1425.53, low of 10/12/2012
1425.48, Fibonacci 23.6% of June-Sept ’12 range
1424.41, Fibonacci 61.8% of Sept-Nov ’12 range
1423.73, high of 12/3/2012
1422.58, low of 12/21/2012
1422.38, high of 4/2/2012
1422.06, low of 10/22/2012
1421.12, high of 10/25/2012
1420.34, high of 12/7/2012
1419.70, high of 11/29/2012
1418.71, high of 8/17/2012
1415.32, high of 5/1/2012
1409.16, high of 11/23/2012
1403.28, low of 10/26/12
1401.58, low of 12/28/12
1399.75, 200-day SMA
1398.11, low of 12/31/2012
1397.68, low of 11/26/2012
1396.56, low of 9/4/2012
1395.14, Fibonacci 38.2% of June-Sept 2012 range
1391.04, low of 8/6/2012
1388.71, low of 5/3/2012
1385.43, low of 11/28/2012
1381.50, Fibonacci 78.6% of 2007-2009 range
1380.39, high of 7/19/2012
1374.81, high of 7/3/2012
1370.62, Fibonacci 50.0% of June-Sept 2012 range
1370.58, high of 5/2/2011
1363.49, high of 6/19/2012
1357.38, low of 4/10/2012
1355.70, low of 7/2/2012
1346.11, Fibonacci 61.8% of June-Sept 2012 range
1343.35, low of 11/16/2012
1340.03, low of 3/6/2012
1335.52, high of 6/11/2012
1334.93, high of 5/31/2012
1329.24, low of 7/24/2012
1329.05, high of 6/7/2012
1328.49, high of 5/22/2012
1325.41, low of 7/12/2012
1311.20, Fibonacci 78.6% of June-Sept 2012 range
1306.62, low of 6/12/2012
1291.98, low of 5/18/2012
1266.74, low of 6/4/2012
1265.26, low of 1/5/2012
1262.30, low of 12/27/2011
1257.58, Fibonacci 61.8% of 2011 range
1244.80, low of 12/7/2011
1239.73, low of 12/1/2011
1238.81, Fibonacci 78.6% of 1,576.09 high
1234.81, low of 11/3/2011
1231.04, high of 12/16/2011
1228.74, Fibonacci 61.8% of 2007-2009 range
1226.64, low of 11/9/2011
1224.57, high of 12/19/2011
1215.20, low of 12/16/2011
1202.37, low of 12/19/2011
1158.66, low of 11/25/2011
1121.44, Fibonacci 50% of 2007-2009 range
1074.77, low of 10/4/2011
1014.14, Fibonacci 38.2% of 2007-2009 range
1010.91, low of 7/1/2010
991.97, low of 9/2/2009
978.51, low of 8/17/2009
956.23, high of 6/11/2009
881.38, Fibonacci 23.6% of 2007-2009 range
869.32, low of 7/8/2009
666.79, intraday low of 3/6/2009
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Tangible Assets, Commodities
U.S. dollar ETF (UUP) turned systematically bearish again on 1/10/13 when it whipsawed back down below its 50-day SMA and a 6-months long downtrend line. UUP fell below its 200-day SMA on 8/31/12, and the 50-day SMA fell below the 200-day SMA on 10/2/12. Support 21.07, and 20.84. Resistance 21.90, 22.05, 22.30, 22.45, 23.14, 23.52, 25.84, 27.19, 28.97.
Agriculture, PowerShares DB Agriculture Fund ETF (DBA) price turned systematically bearish on 1/11/13 when the 50-day SMA crossed down below the 200-day SMA.
Crude Oil, United States Oil ETF (USO) price turned systematically neutral on 12/26/12, when price rose above its 50-day SMA. The 50-day SMA has remained below its 200-day SMA consistently every day since 6/7/12, although the 50-200 spread has narrowed since 1/3/13. Support 34.38, 33.57, 31.00, 29.02, 26.28, and 22.74. Resistance 35.53, 37.17, 38.31, 40.29, 41.38, 42.30, and 45.60.
Gold, SPDR Gold Shares ETF (GLD) price turned systematically neutral on 11/27/12, when it fell below its 50-day SMA. Support: 158.39, 157.40, 154.83, 148.27, 147.19, 143.97, 143.42, and 142.55. Resistance: 164.40, 166.94, 170.01, 174.07, 175.46, 177.40, and 185.85.
Gold Mining Stocks ETF/Gold Shares ETF Relative Strength Ratio (GDX/GLD) turned systematically bearish on 12/27/12, when the 50-day SMA crossed below the 200-day SMA.
Silver, iShares Silver Trust ETF (SLV) price turned systematically bullish again on 2/1/13, when it whipsawed up above its 50-day SMA. Too many recent whipsaws are a sign that Silver is stuck in an unprofitable trading range, however. Support 29.73, 28.61, 27.97, 26.87, 26.13, 25.34, 25.00, 24.44, 22.52, 20.73, and 19.44. Resistance: 31.41, 32.72, 33.31, 34.08, 36.44, 40.23, 41.49, 42.30, 42.78, 44.71, and 48.35.
Silver/Gold ETFs Ratio (SLV/GLD) turned systematically bullish again on 1/30/13, when it whipsawed back up above its 50-day SMA.
Copper, iPath DJ-UBS Copper TR Sub-Index ETN (JJC) rose above its highs of the previous 3 months on 2/1/13, which generally should be taken as a bullish signal. Still, JJC has been consolidating in trading range between 38.99 and 51.41 since October 2011. “Dr. Copper” is widely accepted as one of the better indicators of investor confidence (or lack thereof) in the global industrial economy.
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Spotlight on event stocks: Here is a stock screen I designed to pick out potential event stocks, both Bullish and Bearish. Sometimes, stocks with large changes in price and volume are later revealed to be deal stocks or are the subject of some other extraordinary events, positive or negative.
Bullish Stocks: Rising Price and Rising Volume
Ranked by Price Change * Volume Change
% Price Change, Symbol, Name
12.98% , PMCS , PMC SIERRA
4.05% , ININ , Interactive Intelligence ININ
0.89% , XLG , LargeCap Rydex Rus Top 50, XLG
1.95% , PPG , PPG INDUSTRIES
0.86% , EWO , Austria Index, EWO
2.95% , DELL , DELL
1.32% , IYF , Financial DJ US, IYF
4.16% , LVLT.K , LEVEL 3 COMMUNICATIONS
1.66% , EWN , Netherlands Index, EWN
2.63% , GOOG , Google
2.87% , SIRI , Sirius Satellite
3.21% , CB , CHUBB
2.44% , RYAAY , Ryanair Holdings plc
1.69% , MVV , Ultra MidCap400 Double, MVV
2.97% , TER , TERADYNE
2.49% , TBT , 200% Short US T Bond, TBT
1.02% , PGJ , China LargeCap Growth G D H USX PS, PGJ
3.45% , BAC , BANK OF AMERICA
0.59% , IYK , Consumer Non-Cyclical, IYK
1.01% , EWL , Switzerland Index, EWL
4.61% , ATI , ALLEGHENY TECH
0.72% , IXJ , Healthcare Global, IXJ
0.98% , EFG , Growth EAFE MSCI, EFG
0.95% , IYH , Healthcare DJ, IYH
2.81% , GILD , Gilead Sciences Inc
2.60% , ESRX , EXPRESS SCRIPTS
1.92% , SEE , SEALED AIR
2.89% , MS , MORGAN STANLEY
2.72% , AIG , AMER INTL GROUP
1.91% , DDM , Ultra Dow30 Double, DDM
1.16% , SNV , SYNOVUS
1.32% , SCZ , Small Cap EAFE MSCI iS, SCZ
1.89% , IR , INGER RAND
Bearish Stocks: Falling Price and Rising Volume
Ranked by Price Change * Volume Change
% Price Change, Symbol, Name
-7.68% , TLAB , TELLABS
-3.88% , NOV , NATIONAL OILWELL VARC0
-4.26% , PKI , PERKINELMER
-3.11% , LM , LEGG MASON
-3.28% , MRK , MERCK & CO
-1.94% , MCK , MCKESSON CORP
-3.48% , PWER , POWER ONE
-1.68% , MZZ , Short 200% MidCap 400 PS, MZZ
-2.66% , BCR , C R BARD
-1.58% , PFG , PRINCIPAL FINL
-2.47% , QID , Short 200% QQQ PS, QID
-2.79% , AON , AON
-2.97% , RL , Polo Ralph Lauren
-2.22% , COH , COACH
-1.49% , TIF , TIFFANY
-2.03% , SDS , Short 200% S&P 500 PS, SDS
-2.05% , DXD , Short 200% Dow 30 PS, DXD
-1.52% , TLT , Bond, 20+ Years Treasury, TLT
-0.47% , IEF , Bond, 10 Year Treasury, IEF
-2.88% , KBH , KB HOME
-1.54% , LXK , LEXMARK INTL STK A
-0.38% , NWL , NEWELL RUBBER
-6.00% , NIHD , NII Holdings, Inc.
-0.92% , LLL , L-3 COMMS HLDGS
-1.11% , SH , Short 100% S&P 500, SH
-0.43% , KMX , CarMax
-0.57% , LQD , Bond, Corp, LQD
-1.30% , EXC , EXELON CORP
-0.46% , BWX , Bond Ex-US Treas, BWX
-0.49% , TIP , Bond, TIPS, TIP
-1.19% , EQR , EQUITY RESIDENT BEN INT
-0.63% , GD , GENERAL DYNAMICS
-2.19% , PETM , PETsMART Inc
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One-Day Ranking of Major ETFs, Ranked from Strongest to Weakest of the Day:
% Price Change, ETF Name, Symbol
2.86% Belgium Index, EWK
2.53% Semiconductor SPDR, XSD
2.50% Turkey MSCI iS, TUR
2.34% Thailand MSCI iS, THD
2.22% France Index, EWQ
2.15% Sweden Index, EWD
2.13% Indonesia MV, IDX
2.01% South Africa Index, EZA
1.94% Semiconductor iS IGW, SOXX
1.81% Mexico Index, EWW
1.66% Netherlands Index, EWN
1.61% EMU Europe Index, EZU
1.51% Financial Services DJ, IYG
1.48% Germany Index, EWG
1.33% Financials VIPERs, VFH
1.32% Financial SPDR, XLF
1.32% SmallCap Blend EAFE MSCI iS, SCZ
1.32% Financial DJ US, IYF
1.26% Basic Materials DJ US, IYM
1.23% Dividend ex-U.S. DJ iS, IDV
1.23% Materials SPDR, XLB
1.19% SmallCap Growth S&P 600 iS, IJT
1.18% QQQ Nasdaq 100 Trust, QQQ
1.15% SmallCap Value S&P 600 iS, IJS
1.14% Metals & Mining SPDR, XME
1.13% SmallCap Blend S&P 600 iS, IJR
1.12% Technology SPDR, XLK
1.12% Info Tech VIPERs, VGT
1.12% Silver Trust iS, SLV
1.12% Energy & Nat Res iS GS, IGE
1.05% Europe 350 S&P Index, IEV
1.04% LargeCap Blend S&P 500 iS, IVV
1.04% European VIPERs, VGK
1.03% S&P 500 SPDRs LargeCap Blend, SPY
1.03% Microcap Russell, IWC
1.02% Growth MidCap Russell, IWP
1.02% China LargeCap Growth G D H USX PS, PGJ
1.01% LargeCap Growth Russell 1000 iS, IWF
1.01% Switzerland Index, EWL
1.01% Biotech SPDR, XBI
1.01% LargeCap Blend S&P 100, OEF
1.00% LargeCap Value S&P 500 iS, IVE
1.00% Global ex U.S. LargeCap Blend, ACWX
0.98% Growth EAFE MSCI, EFG
0.98% Capital Markets KWB ST, KCE
0.97% Industrial SPDR, XLI
0.97% Blend Total Market VIPERs, VTI
0.97% Growth VIPERs, VUG
0.96% LargeCap VIPERs, VV
0.96% DIAMONDS (DJIA), DIA
0.96% MidCap Russell, IWR
0.96% Value VIPERs, VTV
0.96% Emerging 50 BLDRS, ADRE
0.95% LargeCap Blend Russell 3000 iS, IWV
0.95% SmallCap Value Russell 2000 iS, IWN
0.93% SmallCap Growth Russell 2000 iS, IWO
0.93% Technology DJ US, IYW
0.93% Energy SPDR, XLE
0.93% Energy DJ, IYE
0.92% LargeCap Blend Russell 1000 iS, IWB
0.92% Growth SmallCap VIPERs, VBK
0.92% LargeCap Blend S&P=Weight R, RSP
0.91% LargeCap Growth S&P 500 iS, IVW
0.91% Energy VIPERs, VDE
0.90% Global LargeCap Blend MSCI iS, ACWI
0.89% Value SmallCap VIPERS, VBR
0.88% SmallCap Blend Russell 2000 iS, IWM
0.88% LargeCap Value Russell 1000 iS, IWD
0.87% Small Cap VIPERs, VB
0.86% Water Resources, PHO
0.86% Austria Index, EWO
0.85% Transportation Av DJ, IYT
0.84% China 25 iS, FXI
0.84% Dividend Appreciation Vipers, VIG
0.83% MidCap Blend S&P 400 iS, IJH
0.82% Dividend SPDR, SDY
0.82% Value LargeCap Dynamic PS, PWV
0.81% MidCap S&P 400 SPDRs, MDY
0.81% Consumer Staples SPDR, XLP
0.81% MidCap Growth S&P 400 iS, IJK
0.80% Foreign LargeCap EAFE MSCI iS, EFA
0.80% Value MidCap Russell, IWS
0.79% Health Care SPDR, XLV
0.79% MidCap Value S&P 400 iS, IJJ
0.79% Latin Am 40, ILF
0.77% Australia Index, EWA
0.74% Energy Global, IXC
0.73% Dividend U.S. DJ iS, DVY
0.73% Canada Index, EWC
0.72% Telecom DJ US, IYZ
0.68% Global 100, IOO
0.68% Russia MV, RSX
0.68% WilderHill Clean Energy PS, PBW
0.67% Emerging VIPERs, VWO
0.67% Real Estate US DJ iS, IYR
0.66% Emerging Markets MSCI iS, EEM
0.63% Italy Index, EWI
0.60% Dividend High Yield Equity PS, PEY
0.59% Pacific ex-Japan, EPP
0.59% REIT VIPERs, VNQ
0.58% Consumer Discretionary SPDR, XLY
0.57% REIT Wilshire, RWR
0.56% Realty Cohen & Steers, ICF
0.55% Brazil Index, EWZ
0.54% Frontier Markets Guggenheim , FRN
0.51% Value EAFE MSCI, EFV
0.42% Dividend International, PID
0.40% India Earnings WTree, EPI
0.39% Commodity Tracking, DBC
0.33% Chile MSCI iS, ECH
0.33% Utilities VIPERs, VPU
0.31% Networking, IGN
0.31% India PS, PIN
0.30% Taiwan Index, EWT
0.27% Utilities SPDR, XLU
0.22% Oil Fund PowerShares, DBO
0.22% Singapore Index, EWS
0.20% Oil, Crude, U.S. Oil Fund, USO
0.20% Hong Kong Index, EWH
0.16% Gold Shares S.T., GLD
0.14% Bond, Muni S&P ATM-Free iS, MUB
0.13% Malaysia Index, EWM
0.11% Financial Preferred, PGF
0.00% United Kingdom Index, EWU
0.00% Bond Treasury Short-Term iS, SHV
-0.04% Bond, 1-3 Year Treasury, SHY
-0.04% Pacific VIPERs, VPL
-0.05% South Korea Index, EWY
-0.19% Spain Index, EWP
-0.19% Bond, Emerg Mkt JPM iS, EMB
-0.20% Bond, High Yield Corp iBoxx iS, HYG
-0.24% Homebuilders SPDR, XHB
-0.25% Bond, High-Yield Junk, JNK
-0.30% Japan Index, EWJ
-0.35% Preferred Stock iS, PFF
-0.41% Bond, Intermediate US Aggregate iS, AGG
-0.46% Bond Ex-US Treas, BWX
-0.47% Bond, 10 Year Treasury, IEF
-0.49% Bond, TIPS U.S. Treasury iS, TIP
-0.57% Bond, Long-Term Corp iBoxx iS, LQD
-0.57% Agriculture DB PS, DBA
-1.11% Bear, Short S&P 500, SH
-1.52% Bond, 20+ Years Treasury, TLT
