Market Commentary

A flat market doesn't mean that nothing happened.  Last week may have started and ended in about the same place; however, the market showed a lot of resilience.

Where Did The Fear Go?

The lack of fear and the lack of selling pressure is surprising to me.  On one hand, that is a bullish sign.  On the other hand, sentiment is often a contrary indicator.

One well known measure is the Chicago Board Options Exchange Volatility Index (commonly referred to as the VIX), a measure of fear and how much investors are willing to pay for options as protection against declines in their portfolios, has drifted down to levels that were coincident with short-term market tops in April 2010 and a series of tops in 2007 and 2008.

In addition, the latest report by Investors Intelligence measuring the sentiment of investment newsletters, shows 56.2% are bullish, while only 20.2% are bearish.  This is the highest level of bullishness since December, 2007 (which was just a couple of months after the severe 2007-2009 bear market began).

Likewise, the weekly poll of its members by the American Association of Individual Investors, showed sentiment had reached 57.6% bullish last week, its highest level in a number of years, higher than just before the 2007 bull market top (54.6% bullish), higher than just before the top in January of this year (49.2%) and higher than just before the April top (48.5% bullish).

It plunged to only 40.0% bullish this week, which had some pundits saying, "Ah, that removes the risk from the investor sentiment side."  But, according to Sy Harding, unfortunately that's not how it usually works.

Smart Money – Dumb Money Confidence Index.

The chart, below, compares the bets made by small traders (a.k.a. the "Dumb Money"), to those of large commercial hedgers (a.k.a. the "Smart Money").

In practice, Confidence Index readings rarely get below 30% or above 70% (they usually stay between 40% and 60%). When they move outside of those bands, it's time to pay attention.

Even more noteworthy is when there is a wide confidence spread with bullish bets by the Dumb Money and bearish bets by the Smart Money. This type of sentiment spread only happens a few times a year. We often get substantial bullish reversals when that happens.

Conventional trading wisdom says that Crowds are usually wrong at turning-points.  That doesn't mean they are wrong all the time (yet I take special notice when the Smart Money clearly disagrees).

Business Posts Moving the Markets that I Found Interesting This Week:

This latest round of quantitative easing is pretty straight forward. Bernanke isn't even pretending that that QE will actually benefit the real economy.  His lack of pretense is almost brazen.  For example, he posted this in an Op-Ed piece in the Washington Post: 

This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action.

Does it surprise you that Bernanke's evidence of success is that the market moved higher? Does it matter if the progress is tangible economic progress (or is improving against expectations enough)?

Of course, Bernanke hopes the wealth effect from stocks will be a catalyst to real economic gain; but to many analysts, it still reeks of manipulation and intentional bubble-blowing.

Taleb Is Saying That Ben Bernanke is a Serial Plane Crasher.

On one hand, Taleb is entitled to his opinions (even if he takes a few liberties with the facts).  On the other hand, what I'm watching is how people (read, "the market") react.  Here is a video of a recent Taleb media appearance.

So, what do you think the smart money is going to do?

Corporate Insiders Dumping Stock at a Record Pace.

Quantitative Easing is supposed to drive stocks up, creating a wealth effect that restores confidence to the economy and spurs more business activity. However, insider selling is way up since the QE2 announcement.

Cisco had a big earnings miss, which sent its shares down 15%.  Meanwhile, Cisco insiders had been selling stuck for the past six month.  During that period, the scorecard shows 6.6M shares sold – and 0 shares bought; well played.

In fact, insider selling hit an all-time record last week. And it isn't over; Steve Ballmer disclosed that he will try to sell $75 million of his Microsoft stock this year.

A Note For Contrarians.

While insiders are selling and global markets are reversing, bullish sentiment soars. Small investor bullishness is back to 2007 levels! Traders will be watching for signs of weakness because this is what happens around a top.

The Markets are at recovery highs.

Traders should remember this important phrase: "Don't Fight the Fed".  It applies here.

Think of Bernanke as the manager of the world's largest long-only fund.  Further, imagine that his goal was to push prices higher.  By the way, you don't have to imagine; he said so.  To make sure you get the point, he even announced $600 billion of purchases to be made in the next 8-months – that's $75 billion a month.  Regardless of whether you think it will work (or if it will be good for the market or the economy), when money is being pumped into the system at this rate, it is difficult to bet against stocks.

In addition, the market tends to do well after the mid-term elections, and going along with that, the 3rd year of a president’s term is historically the strongest.

With all that, it shouldn't surprise you that the stock market continued its bullish ways as investors seemed to applaud the election results, the Fed's second round of quantitative easing, and a decent jobs report.

Let's Look At Some Charts.

The S&P 500 Index broke out above the April high and closed at its highest level in two years. The breakout is significant – if it can hold. Double tops can produce strong pullbacks, but if the breakout holds, the rallies tend to do well. At point “A” below you can see that breakout in March of this year went on to several more weeks of positive gains until the peak in April.

 An Influential Market Sector Is Perking Up.

Many traders believe the financial sector is the most influential group in terms of leading the market.  Financials underperformed miserably in 2007 and 2008 and overall market performance followed suit.  In 2009, financials outperformed and the market recovered a lot of its prior losses. So, where are they now?

Until the bears can tear down support on the financials at that level, it seems pretty solidly bullish.  Expect some of the money that rotates out of other sectors to find a home in financials.  That should spell solid outperformance in the near-term.

What is Really Out-Performing Year-To-Date?

The following chart illustrates the dominance of commodities so far this year. Check the numbers on the following YTD graphic from Finviz .

Puts things in perspective, and makes me think about inflation.

Business Posts Moving the Markets that I Found Interesting This Week:

The Markets are at recovery highs.

Traders should remember this important phrase: "Don't Fight the Fed".  It applies here.

Think of Bernanke as the manager of the world's largest long-only fund.  Further, imagine that his goal was to push prices higher.  By the way, you don't have to imagine; he said so.  To make sure you get the point, he even announced $600 billion of purchases to be made in the next 8-months – that's $75 billion a month.  Regardless of whether you think it will work (or if it will be good for the market or the economy), when money is being pumped into the system at this rate, it is difficult to bet against stocks.

In addition, the market tends to do well after the mid-term elections, and going along with that, the 3rd year of a president’s term is historically the strongest.

With all that, it shouldn't surprise you that the stock market continued its bullish ways as investors seemed to applaud the election results, the Fed's second round of quantitative easing, and a decent jobs report.

Let's Look At Some Charts.

The S&P 500 Index broke out above the April high and closed at its highest level in two years. The breakout is significant – if it can hold. Double tops can produce strong pullbacks, but if the breakout holds, the rallies tend to do well. At point “A” below you can see that breakout in March of this year went on to several more weeks of positive gains until the peak in April.

 An Influential Market Sector Is Perking Up.

Many traders believe the financial sector is the most influential group in terms of leading the market.  Financials underperformed miserably in 2007 and 2008 and overall market performance followed suit.  In 2009, financials outperformed and the market recovered a lot of its prior losses. So, where are they now?

Until the bears can tear down support on the financials at that level, it seems pretty solidly bullish.  Expect some of the money that rotates out of other sectors to find a home in financials.  That should spell solid outperformance in the near-term.

What is Really Out-Performing Year-To-Date?

The following chart illustrates the dominance of commodities so far this year. Check the numbers on the following YTD graphic from Finviz .

Puts things in perspective, and makes me think about inflation.

Business Posts Moving the Markets that I Found Interesting This Week: