Neartermed signals suggest caution

January 28, 20135 Comments

 

Lipper Inc. reported recently that U.S. stock mutual funds experienced the highest two-week inflow of new money since April, 2000. Meanwhile, the Investment Company Institute showed deposits into mutual funds last week were the highest since early 2007. April 2000 was near the peak of the 1982 to 2000 bull market, and 2007 was the peak of the market prior to the Great Recession. It would appear that mutual fund investors are, yet again, piling into these products at high market levels.

The American Association of Individual Investors poll also showed sentiment jumped to 52.3% bullish, and bearishness dropped to only 24.3% last week. If you follow contrarian sentiment statistics, all of this information will have you squirming in your chair right now – too many bulls can be a sign of “irrational exuberance”, as former Federal Reserve Chairman Alan Greenspan once put it. This excess optimism by retail investors often coincides with market tops. Excess pessimism, conversely, can signal a market bottom. Contrarian indicators are not precise buy/sell signals, but I have found that they invariably prove correct – given a bit of time. The recent bullishness by “dumb money” (retail investors and mutual fund buyers) suggests my technical thesis for a market top coming  may be correct.

Meanwhile, RSI, stochastics and other momentum studies are looking overbought, as shown on this weeks chart. I’ve raised a bit of cash for a likely near termed pullback. I sold the last of my Canadian bank positions late last week. I will redeploy that cash upon a reasonable pullback. Seasonal trends can be a bit soft in February, so the coming weeks may provide an opportunity to buy back into some favoured stocks and ETF’s. I’m looking for one last rally into March to my long-stated target of 1550-ish on the S&P 500 before I get out of the market aggressively. I’ll provide some of my favourite ideas to trade theses trends over the coming weeks on this blog.

 

Later this week

I hope to post an interesting study on a trading system that offers a new twist on seasonal investing later this week. It asks the question – is there a way to profit by combining seasonal rotation between high and low beta ETFs?  Look for it on Wednesday or Thursday.

5 Comments

  • Hi Keith:
    1. S&P is stuck around the 1500 for a few days. Is this technically positive? 2. Fundamentally, would good economic data – US employment > 200K change your mind on a near time weakness 3. Since the market appears to go up in a sectoral lock step, would you lighten up on Canadian energy which has gone up a bit, also looks over bought, or would you hold through based on seasonality.

    Reply
    • Khokon–1500, being a round number, is current resistance. No fundamental data changes my mind–I look at the charts first and foremost. But good data could push the index a bit higher before an inevitable pullback occurs. –I’m only looking for a short pullback before the rally resumes to its last highs–perhaps into the spring. My target remains 1550-or perhaps a few points higher.
      I currently hold TSX60 index ETF’s, but no specific energy stocks or ETF’s–I’m playing it a bit more cautiously. But energy is a big part of the 60, so obviously I’m still reasonably bullish on that sector for the time being.

      Reply
  • I hear a lot of media talk that this push into mutual funds is the public finally rotating out of bonds and into equities. If that happens could no that 1550 be taken out not just on short term basis but longer term?

    Reply
    • Hi Dave–I think the 1550 level might be taken out only temporarily
      There are fundamental valuations that will restrict upside going much past that. Also-as you know, we dont know how to time the market perfectly, but we do know how to measure risk and reward. Technical resistnace, 5 year cycle, high Shiller PE, low GDP growth, artificial market stimuation eventually ending (QE1,2,3)–these are risks that must be accounted for when we view the potential for a new bull market breakthrough. I feel that risk outweights reward after 1550-ish due to these factors and others, so its more a question of Clint Eastwood’s Dirty Harry dilema” Well, do you feel lucky?”
      I dont.

      Reply

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