Current Affairs

The markets are showing remarkable resilience in the face of bad news and global unrest. This coming week will be another test, because of the uncertainty surrounding what's happening in Ireland, the fallout from insider trading investigations, and a somewhat oversold market.

Why should insider trading affect the market? Because institutional investors are going to try and get out of any fund they're worried about meeting part of that investigation. The result will be massive redemptions and a lot of selling.  It is certainly something to watch.

Let's Look at World Markets.

It has been a tough two weeks for global markets.  Most major indices are down; and, yet, that is not so bad considering the news about sovereign debt, war, and global cooperation.

Who Is Bailing Out Ireland?

Expect the questions about who will bail out Ireland to weigh on the markets.  Here is a graphic that explains the situation (click on it for a bigger version).

What About the Euro?

According to the Financial Times, BlackRock's founder Larry Fink, founder of BlackRock, the world’s largest money manager, believes that the euro will fall sharply as a result of the escalating eurozone crisis and turmoil in financial markets.

In an interview with the Financial Times, Fink predicts that the single currency, battered this week by the fear that the fall-out from Ireland’s debt problems will spread to other countries including Portugal and Spain, will fall to $1.20 against the dollar, a slide of nearly 10 per cent.

What Level of Holiday Sales Will Santa Bring?

Another driver worth watching will be how the market responds to holiday sales.  Black Friday is one thing; the issue is whether consumers will spend real money throughout the season.

The markets are showing remarkable resilience in the face of bad news and global unrest. This coming week will be another test, because of the uncertainty surrounding what's happening in Ireland, the fallout from insider trading investigations, and a somewhat oversold market.

Why should insider trading affect the market? Because institutional investors are going to try and get out of any fund they're worried about meeting part of that investigation. The result will be massive redemptions and a lot of selling.  It is certainly something to watch.

Let's Look at World Markets.

It has been a tough two weeks for global markets.  Most major indices are down; and, yet, that is not so bad considering the news about sovereign debt, war, and global cooperation.

Who Is Bailing Out Ireland?

Expect the questions about who will bail out Ireland to weigh on the markets.  Here is a graphic that explains the situation (click on it for a bigger version).

What About the Euro?

According to the Financial Times, BlackRock's founder Larry Fink, founder of BlackRock, the world’s largest money manager, believes that the euro will fall sharply as a result of the escalating eurozone crisis and turmoil in financial markets.

In an interview with the Financial Times, Fink predicts that the single currency, battered this week by the fear that the fall-out from Ireland’s debt problems will spread to other countries including Portugal and Spain, will fall to $1.20 against the dollar, a slide of nearly 10 per cent.

What Level of Holiday Sales Will Santa Bring?

Another driver worth watching will be how the market responds to holiday sales.  Black Friday is one thing; the issue is whether consumers will spend real money throughout the season.

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:

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.