An interesting sentiment study by www.sentimentrader.com was posted last week regarding the timing of active managers and their investment decisions. As you can see by the chart below, courtesy sentimentrader, active managers become bearish at market bottoms—just as retail “dumb” money does. That implies that pros are just as subject to their emotions as amateurs. An interesting observation I made when looking at this chart is that – while the active managers may become bearish near market bottoms, their movement into cash often proceeds the actual bottom by weeks or months. In other words, they are right for a while before they are wrong.
Given the early stage of this group becoming increasingly bearish, this might suggest further downside before the true bottom comes into place.
One factor that may drive stock markets up in the near-term could be a dovish commentary by the Fed in Wednesdays meeting. As Larry MacDonald of The Bear Traps Report (www.thebeartrapsreport.com) notes:
“In terms of the rate hike, looking at Fed Fund Futures, they’re pointing to “no hike” in March and June is virtually gone. This makes September the highest probability, albeit at 31% and the Fed will want to reel expectations back in at some point in the near future. This can only be done once the market rallies enough for the Fed to become hawkish once again. As noted above, we believe the Fed will become more dovish, trying to prop up markets heading into March. If credit and equities can strengthen enough, it will give the Fed some leeway to talk about hiking in June. The problem with this is the backlash the market gives the FOMC. We had a 10% selloff, the next will be 15% – 20%, or until it breaks the Fed to ultimately throw in the towel.”
The daily chart below gives us a picture of the current state of affairs. The hammer formation noted on this blog and as noted on my BNN appearance last Tuesday can be a sign of a near termed bottom. This is backed by near termed positive moneyflow, and a rising MACD line. On the negative side, we have near termed momentum (Stochastics and RSI) rounding over from overbought levels. Not to mention the weak but still positive follow-through over the past few trading days. We are still above the low point set by that hammer, but watch for a break of the low 1800’s. That would be bad.
Do you live or work near Oakville, Ontario?
Keith Richards is speaking in Oakville, Ontario for the Canadian Society of Technical Analysts
Wednesday February 10, 2016. 7:00pm. Admittance is free for first time CSTA attendees.
Location: Queen Elizabeth Park Community and Cultural Centre -2302 Bridge Rd, Oakville ON L6L 3L5
If you would like to book Keith to speak about technical analysis or portfolio management techniques, please contact Cindy McIntyre at email@example.com or call 1-888-721-8736