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The article below is a guest contribution by Guy Lerner, writer of the Technical Take blog. The “dumb money” indicator has become extremely bullish (bear signal), and this is what one would expect with rising prices. The higher prices go the more bulls that are recruited. But is it the end of the road for the rally? Not necessarily so. In 1995, 2003, 2009, and Q4 2010/Q1 2011 we saw the phenomenon that I have dubbed “it takes bulls to make a bull market”. It is a market characterized by rising prices and excessive bullishness. In the case of 1995, 2003, 2009, the excessive bullishness and multi-month rally seem to be warranted as the markets were bouncing back from steep losses or a prolong period of consolidation (1995). The Q4 2010/ Q1 2011 version of this phenomenon was a QE2 induced feeding frenzy. With investors taking their cues from the Federal Reserve and European Central Bank, the current market environment resembles Q4 2010/ Q1 2011. For now, we need to respect this dynamic as we could be witnessing another melt up. The bulls have the ball in their court and are on the cusp of turning this recent price move into a multi-month barn burner. The “Dumb Money” indicator (see figure 1) looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investors Intelligence; 2) MarketVane; 3) American Association of Individual Investors; and 4) the put call ratio. This indicator shows extreme bullishness. Figure 1. “Dumb Money”/ weekly Figure 2 is a weekly chart of the SP500 with the InsiderScore “entire market” value in the lower panel. From the InsiderScore weekly report: “Insider trading volume was seasonally thin last week, the result of most insiders being locked-up and prohibited from trading until after their companies’ Q4’11 earnings announcements, as well as the market holiday.” Figure 2. InsiderScore “Entire Market” value/ weekly Figure 3 is a weekly chart of the SP500. The indicator in the lower panel measures all the assets in the Rydex bullish oriented equity funds divided by the sum of assets in the bullish oriented equity funds plus the assets in the bearish oriented equity funds. When the indicator is green, the value is low and there is fear in the market; this is where market bottoms are forged. When the indicator is red, there is complacency in the market. There are too many bulls and this is when market advances stall. Currently, the value of the indicator is 65.09%. Values less than 50% are associated with market bottoms. Values greater than 58% are associated with market tops. Figure 3. Rydex Total Bull v. Total Bear/ weekly Let me also remind readers that we are offering a one-month free trial to our Daily Sentiment Report, which focuses on daily market sentiment and the Rydex asset data. This is excellent data based upon real assets and not opinions. Source: Guy Lerner, Technical Take, January 22, 2012. More on this topic (What's this?) Investor Sentiment: Is this the End of the Road for the Rally? (Comments for thetechnicaltake, 1/22/12) We’re Officially in a Stock Picker’s Market (Wall Street Daily, 2/10/12) 4 Stocks For 2011 – What Went Wrong? (The Wild Investor, 1/1/12) 
During times of great uncertainty I also often focus on long-term indicators to provide some guidance. Let’s by means of example consider the S&P 500 Index. A simple 12-month rate of change, or ROC, indicator seem to pick up the major turning points quite well. Let me say straightaway that monthly indicators are of little help when it comes to market timing, but they do come in handy for defining the primary trend. However, the ROC line below zero depicted bear trends quite clearly, as in 1990, 1994, 2000 to 2003, and from 2007 to March 2009. Right now, the ROC line is on a knife’s edge and is perched right on the zero line. I will, needless to say, be watching this space quite closely.
Source: StockCharts.com More on this topic (What's this?) What Do Long Term Market Indicators Say Right Now? (Guest Post) (Wall Street Sector Selector, 10/14/11) What a Little-Known Market Tool Is Telling Us About U.S. Stocks in 2012 (Money Morning, 1/11/12) Three Reasons Stocks Could Jump 18% in 2012 (Wall Street Daily, 1/24/12)
The article below is a guest contribution by Guy Lerner, writer of the Technical Take blog. There is a sense of incredulousness regarding the recent price action. The market seems to levitate day in and day out despite the news. Dips are limited to 15 minutes of intra-day action. Volume? We don’t need no stinking volume. From this observer’s vantage point, it just doesn’t smell right, but who am I to argue with the market? Since the low on October 4, the SP500 has traveled 20%. From those same lows to the end of October, the SP500 traveled 16.67%. Since November 1 to Friday’s close, the SP500 has earned 2.9%, which annualizes to about 15%. This is what one would expect from the price cycle as the best gains occur when investors are bearish and then the gains become a bit more begrudgingly. Of course, that is all in the past. The question everyone wants the answer to is “what’s next?”. With the “dumb money” indicator approaching bullish extremes, the market is at the juncture where there are really only two outcomes. One, the market rolls over as the overbought and overbullish conditions lead to a correction. Or in option two, the market just continues to levitate higher as overbought becomes more overbought, and this multi-week rally morphs into a multi-month rally. Not particularly insightful, but in the current market environment, where you need to suspend any kind of common sense or logic, that is about the best I can do. Somewhere in here and over the next couple of weeks, we should have a resolution to the question of “what’s next?”. When it comes to equities, our portfolios are positioned bearishly, yet, we have our “line in the sand”. I have stated for weeks that the only way we will know that the Fed and ECB have averted a “crisis” — and you can pick from several percolating around the globe –is by having higher prices. A monthly close over the simple 10 month moving average by the SP500 would be one such indicator. The “Dumb Money” indicator (see figure 1) looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investors Intelligence; 2) MarketVane; 3) American Association of Individual Investors; and 4) the put call ratio. This indicator shows neutral sentiment, but it is nearing extremes in bullishness. Figure 1. “Dumb Money”/ weekly Figure 2 is a weekly chart of the SP500 with the InsiderScore “entire market” value in the lower panel. From the InsiderScore weekly report: “With the vast majority of insiders locked-up and prohibited from trading until after their companies announce Q4’11 earnings, trading volume was extremely – and not unexpectedly – low this past week. Volume should remain thin through the end of the month and then ramp up dramatically as earnings season gets started.” Figure 2. InsiderScore “Entire Market” value/ weekly Figure 3 is a weekly chart of the SP500. The indicator in the lower panel measures all the assets in the Rydex bullish oriented equity funds divided by the sum of assets in the bullish oriented equity funds plus the assets in the bearish oriented equity funds. When the indicator is green, the value is low and there is fear in the market; this is where market bottoms are forged. When the indicator is red, there is complacency in the market. There are too many bulls and this is when market advances stall. Currently, the value of the indicator is 63.41%. Values less than 50% are associated with market bottoms. Values greater than 58% are associated with market tops. Figure 3. Rydex Total Bull v. Total Bear/ weekly
Let me also remind readers that we are offering a one-month free trial to our Daily Sentiment Report, which focuses on daily market sentiment and the Rydex asset data. This is excellent data based upon real assets and not opinions. Source: Guy Lerner, Technical Take, January 16, 2012.  By Prieur du Plessis, on January 15th, 2012 posted in: Investment, Stocks, Wall Street  One comment so far
Investors last week faced a tug of war between signs of an improving U.S. economy and lingering concerns about Europe’s debt malaise. The Euroland worries moved to center stage on Friday when Standard & Poor’s downgraded the credit ratings of France, Austria, Italy, Spain, Portugal and four other European countries. Also denting sentiment were rumblings out of Greece, suggesting that the recently agreed bailout terms were now in doubt. After starting off the year better than any other since 2006, the S&P 500 Index had its worst day of the year on Friday, but nevertheless remained in positive territory for the week as a whole. Trading on stock markets during the second week of 2012 was again characterized by light volume, but it was nevertheless a good week for most risky assets such as stocks, corporate bonds, and precious and industrial metals. Equities gained ground for the second consecutive week as shown by the performance of the two principal global equity benchmarks: the MSCI World Index closed 0.8% higher and the MSCI Emerging Markets Index surged by 2.8%. In a clear reversal of last year’s pattern, emerging markets have so far this year outperformed developed markets by a factor of 2.5. Click on the table below for a larger image.
On the issue of mature versus emerging markets, well-known investor Marc Faber said: “What we had in 2008 was the outperformance of the U.S. and emerging economies’ stock markets and commodity markets got hit very hard, but it lead to a major low in emerging stock markets that bottomed out between October 2008 and March 2009. After that emerging stock markets outperformed the U.S. until the end of 2010. So I think we may get a similar picture. I read all the strategies that say we should invest in the U.S. I say maybe that’s correct for the next three months or so but I would rather be looking at an entry point in emerging markets over the next six to nine months.” As far as the U.S. is concerned, all the benchmark indices ended the week in positive territory, with the S&P 500 and the Dow Jones Industrial Average gaining 0.9% and 0.5% respectively. But the real star was the Russell 2000 Index that improved by 1.9%. This is a good sign for the overall market as outperformance by small caps is normally associated with rising markets. Al the U.S. indices are also higher for the year to date, ranging from +1.7% to +4.1% – in the case of the tech-heavy Nasdaq Composite Index. When one considers the 10 economic sectors of the S&P 500 Index, it is clear that the cyclical sectors were the stronger ones over the past few days. These are sectors such as Materials (+3.9%), Financials (+3.1%) and Industrials (+2.6%). Not shown, Homebuilders (+7.5) surged on the back of Lennar reporting a solid increase in new orders. The lagging sectors were the defensive ones such as Utilities (-0.4%) and Consumer Staples (-0.3%). Energy also fared badly and was down by 1.4%. This pattern of cyclical sectors outperforming defensive sectors is what one would expect in the bull phase of a stock market.
Source: U.S. Global Investors – Investor Alert Moving beyond the U.S., most stock markets ended the second week of the year in the black. Among mature markets, strong performers included Singapore (+2.8%), Australia (+2.2%), France (+1.9% – notwithstanding the country’s credit rating cut) and, surprisingly, Spain (+1.9%). In the emerging markets category China at long last rebounded, closing 3.7% higher. Also performing well were Hong Kong (+3.3%) and Brazil (+2.3%). The notable downmarkets included Portugal, New Zealand, Holland and the U.K. Prior to last week’s improvement, the Shanghai Stock Exchange Index dropped by more than 30% from its high of August 2010. The trigger for the turnaround was Chinese bank loans and M2 money supply both rising more than expected as Chinese officials started taking action to stimulate the economy. Chinese equities look attractive from a valuation point of view and it would seem that investor concerns about slowing economic growth and a further shake-out in the property market have already been discounted by stock prices. More on this topic (What's this?) Crisis in Europe: Prepare for Repercussions from Standard & Poor's Credit Rating Downgrades (Money Morning, 1/13/12) The EU’s Great Kowtow to China (Wall Street Daily, 2/2/12) Prepare for Europe – "It's Going to Be Ugly" (Money Morning, 1/16/12) By Prieur du Plessis, on January 14th, 2012 posted in: Economy, Investment, Stocks Leave your comment
When it comes to guest contributions, I always try and present arguments on both sides of the scale. In this regard, a particularly bearish article on the U.S. stock market comes courtesy of Comstock Partners, the highly regarded investment manager run by Charlie Minter and Marty Weiner. The opening paragraphs are below. “The U.S. used unusual methods in handling the bursting of the “Financial Mania” of the late 1990s, the one called the “Dot-Com” bubble. Instead of letting the free markets dictate just how low the prices of stocks and other assets would wind up after the bursting of the bubble, the “powers that be” intervened. The Greenspan-led Federal Reserve reduced Fed Funds from 6 ½ % to 1% and started a second bubble, an unbelievable housing bubble. They attempted to stop home prices from declining, and the intervention generated an enormous increase in total debt ($26 trillion to $53 tn). We have discussed in past commentaries the onerous consequences of excess debt on the economy–especially when the excess total debt occurs in the consumer and housing sector. These two sectors are the main drivers of the U.S. economy and, if these sectors’ debt problems are as structural as we believe, the U.S. economy will have a very difficult time recovering any time soon. “When the stock market finally broke down in 2000, we were convinced that we had just completed the largest financial mania in history and that the stock market would enter a secular (or long term) bear market. Our conviction was based on the fact that the S&P 500 traded at more than 50% higher than at any prior market peak valuation. The NASDAQ traded at 245 times earnings, 16 times the average NASDAQ P/E from 1971 to 1991. Also, almost every Initial Public Offering (IPO) rose to 3 to 5 times the IPO price, topping all other significant financial manias by a long shot. A large number of these IPOs had no earnings, while others were merely start-ups with no sales. “We knew that the after-shocks of a financial mania would result in a severe bear market that would be very painful when the market fell back to normal valuations. However, if the “powers that be” had let the free markets work and had let stocks drop to below average valuations typical of major bottoms, the pain would have been much less. Furthermore, housing markets would have also dropped to typical levels in relation to family median income. The free markets would have set the supply-demand balance, and the excess debt build up over the 1990s could have declined to manageable levels, as consumers rebuilt their balance sheets. However, that is not what took place!!!” A few charts from the report are published below, I strongly suggest that you also read the full article. Total Credit Market Debt as percentage of GDP
Household Debt as a percentage of Disposable Income
Household Debt as a percentage of GDP
Source: Comstock Partners – Special Report, January 12, 2012. More on this topic (What's this?) Central Banks Push QE To Fight Deflation and Debt (Trends I'm Watching, 1/27/12) Not Much of a Debate: Inflation is Part of the Plan (Money Morning, 1/31/12) Chart: A Blow to Inflationists (Investment U, 10/24/11)
I often use the 50-day moving average as an indicator of the secondary trend of a stock market, and the 200-day moving average as an indicator of the key primary trend. Specifically, one would like to see a stock market index trading above both these measure, but importantly above the longer-term 200 day line. I have analyzed the numbers using yesterday’s closing levels, and the following are a few key observations:
The tables below show the detail, with stock markets ranked from those trading the furthest below their moving averages to the ones that are the furthest above the averages. Developed markets: ranked according to 50-day moving average
Developed markets: ranked according to 200-day moving average
Emerging markets: ranked according to 50-day moving average
Emerging markets: ranked according to 200-day moving average
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