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In forecasting stock market movements, I’ve developed a model consisting of many components and indicators. Here’s a brief overview of where four of my five basic categories stand now:
1. The fundamental valuation of the stock market is very high.
2. The macro-economic or business cycle threatens to turn down again.
3. Liquidity indicators for the G7 countries have deteriorated sufficiently during the past 12 months to rate them as a clear negative for the stock market.
4. The overall technical picture shows some signs of a possible stock market top. But all in all it’s more or less neutral.
Have a look at the S&P 500 in the top panel of the following chart.
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Prices are back to where they were earlier this year …
This chart pattern leaves us with two distinct possibilities: Either the market is ready for a breakout to new cyclical highs, or we are looking at a double-top to be followed by the next major bear market move.
Since three of my forecasting model indicators are clearly bearish, with number four — the technical picture — neutral, the latter scenario is much more probable.
Next, I want to discuss the fifth category of my overall model: Investor sentiment.
Investor Sentiment
Extremely Bullish!
The second panel from the top in the above chart shows Investors Intelligence bullish advisory sentiment. As of last week the percentage of bullish stock market advisors surpassed the threshold of 55 percent. Readings above 55 percent have historically been a harbinger for a larger stock market correction or a major stock market top.
The two lower panels — bearish advisory sentiment and the ratio of bulls to bears — are giving the same message as Investors Intelligence.
What’s more, two weeks ago, when the S&P 500 briefly exceeded April’s high, the American Association of Individual Investors reported that 57 percent of private investors were bullish, a very lofty number. At the same time the 10-day average of the CBOE put/call ratio reached the lowest reading since the April high.
Plus mutual fund cash levels are at 3.5 percent — very close to their all time low of 3.4 percent.
This brings the question: With so many investors bullish or fully invested, who is left to do the heavy lifting for further stock market gains?
Oh, and one more thing: Corporate insiders are bucking this trend … they’re selling their stock like never before! This should get you wondering if they’re paying attention to something that the bulls choose to ignore.
Best wishes,
Claus
P.S. This week we have an encore presentation of one of our favorite Money and Markets TV episodes. We take a look at an asset class that anyone buying supplies for Thanksgiving dinner is very familiar with: Soft commodities. And despite a recent drop due to concerns about slowing demand from China, soft commodities are still in the midst of a major bull market.
So tune in tomorrow night, November 25, at 7 P.M. Eastern time (4:00 P.M. Pacific). Simply go to www.weissmoneynetwork.com and follow the on-screen instructions. Access is free and no registration is required.
{ 9 comments }
It is possible that part of the insider selling may be due to the looming issue of US income and capital gains tax rate increases. Selling now eliminates the uncertainty. Which poses the question, should Congress extend the current rates, would the insider money return to the market?
Otherwise, I am in agreement that most signs point down for the stock market.
Hi Claus,
I read your mail alot – you were right on with your call on bottom – Mail around end FEB 2009 – your call that there was more upside off a inverse head and shoulder –
Now you have been call a major top for months – Timing is everything –
Love all your article
Try dividing the S&P 500 by the price of gold. It has been moving down for over a year.
I completely agree the Sentiment is way too Bullish. With all the other indicators signaling a selloff. The QE2 can only salvage so much. It is only a matter of time before the masses start running for the hills or will standby wondering what happened. Here is an article by Greg Roy indicating the same predicament but in a different text: http://principletrader.com/index.php?option=com_content&view=article&id=44:can-the-fed-stop-water-from-flowing-downhill&catid=9:blog&Itemid=10
Claus,
Is there any evidence that sentiment indicators are actually predictive of market moves? I think investor sentiment is a function of the market trend. When the market is trending up, people get more bullish, and vice versa when the market is trending down. The longer the trend goes on, the more people jump on the bandwagon. It’s basic psychology. Sentiment is a lagging indicator of market action. Except for maybe late April 2010, depending on your time frame, bearish predictions based on sentiment or anything else have been dead wrong for a year and a half now.
Claus, I enjoy your and Mike Larson analysis the most of the whole team of Money and Market. They are short, consistent and most accurate. Thank you for the good job and sharing your wisdom with us.
Claus I love to read yours and Bryne Rich’s analysis of the market. your information is rational and based of good cautious analysis of general economic condition of the various countries. Thanks a lot
Claus,
In one of your oped’s you stated that we, as investors, ultimately have to eat our losses. This is true. But the sad truth is that we also have to eat the huge losses created by our government in the form of higher taxes, currency manipulation and programs such as government health care. Investing these days is not for the weak of heart. We are now in an age of trying to hold on to our fortunes rather than growing them.
Looks like June 6th, 2011 will be the market bottom. From there on it’s a climb back to and beyond today’s prices as inflation kicks in. Watch out sky…here we come.