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 protected] or call 1-888-721-8736
Would you consider doing a blog on inverse market ETF’s. I’m particularly interested in a single inverse Canadian ETF for the S&P 500 but i’m not sure one exists. This may be especially timely if the S&P 500 can bounce up to recent resistance levels, perhaps triggered by the FED (also starting to hear a lot more about negative interest rate experiments).
P.S. Nice call on XGD
I just found your “Hedging in a Bear Market” blog where you have already discussed this topic.
You mentioned on Market Call last week that you use logarithmic scale. May I ask please, if a stock is breaking out of a linear scale, but not a logarithmic-based chart, (or visa versa) which chart has more credence?
Log charts are the only ones to watch, Chris. A stock that moves from $10 to $11 has had a significant move of 10%. A stock that moves from $100 to $101 has barely moved at 1%.
So, yes, a log chart is imperative when illustrating a breakout – a $1 move out of a base on the $100 stock may seem significant on a breakout (which it probably isn’t) vs. the $1 move when it was trading at $10, or $20.
I write about this in my book Sideways-I humbly might suggest you read it-I call it my 3&3 rule–3% and 3 days = confirmation of breakout. Its the percentage move that counts, and the fact that it wasn’t a 1-day blip.
Thanks….I bought it, read it, but obviously didn’t clue into the 3% pertaining to the charts…thanks for clearing that up for me! Cheers!
I watch the smart money-dumb money indicator as well. As I understand the calculation, it measures value of trades in first half hour and contrasts with the value of trades in the last half hour of trading. If we listen closely to money managers (usually BNN) it appears few if any would qualify as being unemotional. So that begs the question who is being measured as smart money and less emotional? You suggest institutional and that makes sense but what sets them apart from the rest of us. Do they not have their own money in the fund they manage? Are they at arm’s length from the fund they manage? I think if we could answer these questions, we could become better at managing our money? Any thoughts?
Terry–simply awesome comments–thanks for this
First– morning vs. afternoon movements is a different version of smart/dumb measurement. I did a study on it, and while i think it has merit at times its not as accurate an indicator in most markets.
Smart money –as far as http://www.sentimentrader.com goes–is defined as large institutions,( usually pensions etc) commercial hedgers (who know their product intimately), insiders etc. The smart money group does NOT include Portfolio Managers like myself and the BNN types for the most part–nor does it include fund managers
In fact, we are lumped in as dumb money with the retail money and small speculators. Makes me feel warm all over to be in the group!
The important thing IS THAT YOU AND I WILL ALWAYS BE “DUMB MONEY” BUT WE CAN RECOGNIZE THAT AND FOLLOW THE SMART MONEY–THUS WE WILL PERFORM BETTER THAN OUR DUMB MONEY STATUS WOULD SUGGEST
So smart money should be considered as the traders who have historically proven to be good at timing markets. Quantitatively, and historically that is. Sentimentraders research does a bang up job of following them–and if you watch the movements–you will see it works.
BTW–for what its worth–I have my money fully invested in my own portfolio–in fact, the base models are run off of my personal accounts! Hopefully that says something…
Thanks for setting me straight. It is the SentimentTrader.com version I follow. Nothing personal but good to hear portfolio managers and not included with the smart money. This gives me more confidence following this indicator as I agree the early and late trading indicator has flaws that undermined my confidence in the past for the indicator. You do say considerable when your personal portfolio is fully invested.
Further to the discussion re. SentimentTrader.com indicators, my favorites are the smart/dumb money indicator and the % of indicators at an extreme excess optimism/pessimism. I like them because they are straight forward and for their accuracy within a relatively timely manor (seem to be very leading).
When analyzing the sentiment indicators, are divergences relevant in the same way as momentum divergences are with the underlining S&P 500 index.
Would you share your favorites SentimentTrader indicators.
I am looking for rally to trade short term as well as looking for a potential inverse ETF entry point for later on if/when a rally occurs (to hedge positions and/or for profit).
Some other market data such as transports relative to gasoline prices, and defensive sectors relative to risk-on sectors are not painting a very positive picture, but I don’t have a sense of the time horizon they relate to. In general I have always thought that the market cycle leads the economic cycle. Any insights on this would also be greatly appreciated.
Ron–I have a pretty disciplined approach to my macro calls. Basically, I look at:\
-trend–which includes the phase (peak and trough patterns) and the 200 day MA–pls read my book Sideways
-sentiment (favorites are smart/dumb, AIM, Small put buying, risk appetite index), + I chart the put/call ratio on stockcharts and look for extremes
-breadth–which includes cumulated AD line vs. S&P500 and Dow Theory (INDU/ TRAN)
-breadth momentum –which includes new high/low, and % over various MA’s–I look for extremes
–VIX–I look for extremes
-PE trailing and Shiller PE–again, looking for extremes
I assign “points” to each factor and then come to a conclusion. The biggest factor is trend. All else is important, but trend determines how aggressive I will be (cash vs. beta)
Keith – Excellent.
That Risk Appetite index is interesting and is a neat way to encapsulate that “other” market data I was referring to like relative performance between defensive and economically sensitive sectors. Very Cool.
I have read SmartBounce and will read Sideways. I agree the trend is most important of all. Also very important to me are some other technical analysis (channel and base/top patterns, support/resistance, and momentum divergences) but all in the context of the macro picture including the major secular and cyclical trend.
Thank you for sharing your knowledge and experience. I have been at this for 10 years but there is no end of learning and no substitute for experience.
BTW–if you read and like the books, it helps me if you will post your (hopefully positive) comments on Amazon and or Indego
Do you think it’s a good time to be changing US cash and stocks into Canadian money or is there still more growth opportunities in US stocks? Thanks,Jack
I hold US stocks, and select Canadian stocks (non energy related, with the exception of one 5% position in a pipeline). We look at the dollar regularly. It looks like the USD is in store for about 3 cents or so downside vs. world currency basket. However, CDN dollar is not necessarily boosted by that– if oil stays weak. So its a USD vs. the world, and USD vs. the loonie equasion you and I as Canadians need to pay attention to. It looks like the loonie/USD is neartermed overbought at this point–and remains in a bear trend vs. USD until proven otherwise. I am positioning a fairly balanced portfolio–not bailing out of USD but certainly paring back a bit.
Is is too early to start getting back into the Canadian banks? They have had a pretty good selloff. Would you wait for more basing and a breakout from support? Thanks.
Mediocre pattern at this point John–hard one to call. They are a bit correlated to oil lately given that commodities affect on CDN economy thus the bank’s profits. Oil is trying to stabilize and base–so give it a bit and see if that can hold up before going in too deeply to the banks.
Have we broken support on the S&P500? It closed at 1829 today and it looks like all the support over the last 2 years will be taken out if we don’t have a rally in the next 2 or 3 days.
I know this is a dilemma. Nobody wants to lose over 10% in just over a month (or over any timeframe really). But there are a lot of studies that show that retail investors have bad timing, buying high and selling low. Do you have any thoughts on when to leg out?
See my comments to Jason Eric