One group of technical indicators to which we assign a great deal of importance, are the market sentiment indicators. Historically, when the sentiment indicators show significant pessimism by market participants, it has created a good buying opportunity.
Some of the sentiment indicators we watch are the option market put/call ratios, the Rydex fund family bull fund vs. bear fund flows, corporate insider buying, market newsletter writer sentiment, and also individual investor and consumer sentiment polls. I have added some charts of these sentiment indicators below. As you can see many are close to, if not beyond, the green lines which represent extreme pessimism and thus a possible good market entry point. The sentiment indicators can change very quickly and therefore are not reliable as long term buy or sell signals. But, the sentiment indicators can be good entry point indicators and we use them in tandem with other technical indicators to dictate short term strategy. The sentiment situation is about all we have currently to make the bull case.
INVESTORS INTELLIGENCE BULL/BEAR RATIO
S&P 100 (OEX) PUT - CALL RATIO
ISE SENTIMENT INDEX
RYDEX BULL VS BEAR FUND RSI
THE BEAR CASE
Moving to the bear case, over the last few weeks we have received a string of continuous poor economic data. Much of this macro data suggest an economic slowdown is underway. Let's take a look at some of the recent economic data points.
June ISM, 56.2 , expectations were 59, prior month was 59.7
June Auto Sales, 3.7 mill, expectations were 4 mill, the prior month was 3.9 mill
June Pending Home Sales, -30% , expectations were -10.5%, prior month was +6%
June Factory Orders, -1.4%, expectations were -0.6%, prior month was +1.0%
June Retail Sales, -0.5% , expectations were -0.2, prior month -1.1%
Philly Fed Manufacturing, 5.1, expectations 10.1, prior month 8.0
NY Fed Manufacturing, 5.08, expectations 18, prior month 19.51
We can plainly see a sharp slowdown in the economy in the May/June period.
Another point for the bearish case comes in the fact that the S&P 500 continues to trade below its 200 day moving. We also recently received a sell signal known as a "death cross". This occurs when the 50 day moving average crosses below the 200 day moving average. (See chart below, orange line= 50 day ma, blue line= 200 day ma). We have looked back at the reliability of the death cross signal and although in recent years it has had some failures, but over the long haul it does carry some statistical significance. Had you heeded the death cross signal in early 2008 , you would have avoided a 60% decline in the market.
S&P 500 WITH DEATH CROSS
HOW DOES IT PLAY OUT
The sentiment is so bad that we will probably get another bounce in the market, near term. We may take a small position in the equity ETF's if the market can show some strength over the next few days.
The fact the economy has begun to slow again, along with the failure of the S&P to climb and hold above its 200 moving average does not bode well for any lasting rally. Another noticeable pattern has been the series of lower highs and lower lows in the S&P 500 since the April highs. We would need to trade and hold above the 1120 area to break this pattern. Overall the economic and longer term technical indicators lead us to believe that any rally may be short lived, and we will remain nimble in this difficult tape.
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