Stocks climbed back to nearly even for the week after the close of Wednesday’s trading, as the stock market continues to be inundated with some heavily bearish sentiment indicators.  Recently, it seems there are a number of different indicators which suggest the market may be slightly overheated following the nearly year-long bull market in stocks.  Here is a non-exhaustive rundown of some of the key data and survey results from the first part of this week that will test the market over the coming days.

  • Consumers On Tuesday, consumer confidence plunged about 10 points, which is among of the most dramatic shifts in 30-years.  Consumers do not see this as a good time to spend, and why should they?  Unemployment continues to grow and the labor market remains extremely bleak with prolonged joblessness relatively normal for those out of work.  Many analysts will not pay much heed to this survey as many consider it a lagging indicator, but a drop in consumers’ confidence actually preceded the credit crisis induced financial meltdown.  The volatility index or VIX, which is often referred to as the fear index, ratcheted up 9% on Tuesday because of this news.
  • Investors After uninspiring sponsorship for at least the last few months (high volume on down days, low volume on upswings), short selling is back in a big way.  Biweekly data released by the New York Stock Exchange shows the third straight biweekly increase in shorting activity, as short interest rose to 14 billion shares on the NYSE.  Over the last two weeks, there was a 3.8% rise in shorting and it stands at the highest level since August of 2009.
  • Insiders Insider trading statistics are often used as a gauge of corporate executive’s stance on their stock’s valuation.  Of course, there are many different reasons why a corporate manager may sell as stock apart from valuation, but when the overwhelming majority of corporate trading is selling, we do take note.  We have documented widespread selling at various points over the last year, and obviously, the rally stayed largely on track.  Data from Finviz for last week shows that insider selling ticked up 17% and total dollar values sold greatly outnumber values bought by corporate executives.  Selling topped $956 million in the week compared to just $96.3 million in buying activity, and insiders are at their most bearish level so far this year.  Again, this has not been a good indicator of market direction in the last year, but does give some insight into the corporate insider’s psyche.
  • Homebuyers Maybe it was the excruciatingly cold weather in January, but new home sales slid 12% in the month and were far worse than economists’ expectations of a gain of 3.8%.  At an annual rate of 309,000, the current rate of 20k lower than the previous all time low!  With the first-time homebuilder tax credit set to expire in the next few months, nearly everyone expected a stronger housing market last month.  The next few months will tell whether the tax credit has run its course or if it still has legs.  Either way, potential homebuyers shunned buying a house last month, and if this is more than a one-month aberration, housing could see its own double dip.

The reasons for the shifting sentiment are many from sovereign debt issues to labor market weakness.  However, we think the main reason is just a natural moderation in sentiment after prolonged periods at each of the extremes with little time in between.  After the credit crisis set in, investor sentiment fell to very bearish levels and since this rally began investor sentiment quickly transitioned to exuberance.  We are hopeful that the increasingly bearish sentiment is just a return to more even-keel levels, and not a return to the fear, uncertainty and doubt investors felt in late 2008.

Latest Data Shows Sentiment is Firmly Bearish