Friday, August 28, 2015

lots of pessimism

I think the drop from the US stock market high points of 2015 ended at the low points made early on August 24, this past Monday. A lot of bearish sentiment appears to have developed and this should be fuel for an extended rally if not for a move to new bull market highs.

The bottom three images show the front page of the New York times on August 22, 25 and 26. Seldom does one encounter a sequence of three bearish headline within such a short span of time. Headlines like these as well as the warnings offered by the talking heads on cable TV business shows all encourage "low information" investors to sell. This phenomenon typically appears close to important lows in the market averages. 

The top two charts offer information which highlights the bearish state of trader sentiment.

The chart at the top is from Mark Hulbert.  The red line on the chart shows the recommended market positions of Nasdaq trading advisors  in terms of the percentage net long or short which they suggest for their readers. Not only are they net short 50% as a group but this is the lowest (i.e biggest net short number) reading Hulbert has seen in 5 years. This is quite amazing given that the market averages have only dropped about 12-15 %. It shows very strong bearish sentiment and as such is a bullish portent for the market averages.

Right below Hulbert's chart is a chart showing the 5 day moving average of the put-call ratio for CBOE equity indices. It is at its highest level in more than three years. This too is strong support for a bullish prognosis for the averages.

Sentiment has turned from modestly bullish to very bearish in a very short time. This quick turn to bearishness is more characteristic of reactions in a bull market than of the start of a new bear market. At the very least the averages should head generally higher over the next several weeks. Any modest encouragement by the Fed in terms of delaying its projected interest rate increases will probably result in new bull market highs. 

1 comment:

Samuel Chetty said...

Hi Carl,
I too have noticed the very bearish sentiment. After the big woosh down early this week, analysts on CNBC seemed to have a consensus that more downside was likely. Also, MSN's finance site has had many articles warning about a new bear market.

I still don't know if Monday's low was the bottom, but in any case, I don't think it will be taken out by a large margin.