Big malls and places like Disney give you a map showing you where you are in the mall or resort. My first chart shows us where we are in relation to the market’s recent support/resistance zones. The S&P broke support last Friday, and is now toying with my previously described final support zone. The chart below paints a pretty good picture of where we are. A break of 2540, as I noted on the above blog link, spells trouble. For now, keep calm and carry on.
Not everyone is calm, which is a good thing!
In the past, I have mentioned that one of my favorite contrarian indicators is pitting smart money against dumb money. As you’ll note on sentimentrader’ s smart/dumb comparable, the dumb money is clearly selling while the smart guys are buying. In fact, only 26% of dumb money is confident about the market now, whereas 69% of the smart folk are confident about investing in equities. Note on the confidence spread below that clusters of high smart money vs dumb money confidence has lead into a renewal of the bull market in the last few market selloffs. While this is not a longer termed study, I do have some longer dated data that might back such a potential up a bit.
Lipper notes that the outflow of mutual fund equity investors (dumb money) is the highest in 15 years. US equity investors have taken some 0.44% out of equity. Since 2002, every time that number has gotten over 0.25% outflow of equity funds, the markets were higher one month later (9 out of 9 occurrences). According to sentimentrader.com, every time there is a 6-month low set in December, markets are higher a month later (8 out of 8 occurrences since 1950). Seems to be some agreement in the data on that.
Finally, Larry McDonald’s “Bear Traps” research notes that world markets are looking to be in a capitulation phase. Larry is probably one of the smarter cookies out there, and his main focus is looking at opportunistic capitulation – he routinely examines world markets, currencies, commodities, bonds…you name it.. for oversold trade opportunities. Larry is no mid or long termed investor, so that must be kept in mind. He’s pretty neartermed in outlook. But his ACG analysis, which I have followed for about 5 years now, is usually pretty good. A vote of confidence towards an oversold bounce (particularly in Europe and emerging markets) by Larry isn’t a bad thing. I will note that he thinks we will see a bounce, then a new down leg bringing NA markets into a genuine bear. Again, he has models that tend to be decent at predicting such events – albeit not accurate all of the time (but, who is?).
Watch for a reversal in market movements over a few days. This might signal an oversold bounce trading opportunity with a potential for a few weeks to a month of upside. Again, though, watch for the bounce.