Sep 21, 2011

Market Sentiment Review



In this weekly sentiment review indicators show more bullish signals as markets tend to rebound from August lows. Investors are still cautious measured by investors fear gauge (VIX), although the indicator stalled showing reversal signs.



Number of companies above 50 MA started to rise with markets rebounding but its move coincides strictly with S&P500 index move. Current  reading of 35% of the companies out of the S&P still indicates oversold signals, leaving markets place to recover. Levels between 10% and 35% signal oversold markets since those levels are -1 to -2 standard deviations from mean level of 59% for the period one year back.


Put/call ratio is falling from its extreme levels in mid August signalling fading bear mood. If compared to previous year correction started April 2010 the indicator's peak is higher in current, which means that current market is heavy oversold. In April 2010 put/call ratio started falling but market trend reversed after the ratio crossed its mean (0.92). Still we are far away from that level, however direction is downward, sign for upcoming reversal.

% of S&P 500 stocks above 50-day MA, Put/Call ratio, VIX


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Sep 9, 2011

Markets Set To Rise



Just before the sell-off one month ago I predicted recent market drop in the post Next market wave and signalled it in June post S&P Technical Outlook. Actually it was not me but the Elliot Wave Theory used in the analysis. Current market condition suggests that applied wave analysis was correct, which leads to the question regarding next market move. There are clear signals that latest correction shaped fourth wave. Considering that and if we assume it bottomed out at 1072 we should be at the beginning of new bullish market - the last fifth wave of the theory. 

S&P 500 just finished 4th wave
Chart Source: stockcharts.com

Recall last correction (third wave), which lasted 4 months, we should be in the middle of current pull back. That statement is supported by weak macro data and huge uncertainty about further easing from FED. According to Bernanke's statement inflation is "on its way down" thus indicating that possibility of implementing stimulus package is rising although its shape is expected to be different from last two QE's. Meantime President Obama signalled new jobs plan which is claims to support hard hit labour market. $447 bln Jobs Stimulus Plan includes investments in infrastructure and tax vacation for small businesses. The plan is going to be financed with next decade tax increases. Last proposal disappointed markets yesterday and they reversed the initial rally. 

Historically September and October have been crucial for the markets. If mentioned above policies are implemented they could be positive for the financial markets and thus give a boost, completing last fifth wave from the bull market started March 2009. The correct policy at the moment is not austerity sacrificing the growth but shоrt term stimulus in order to stabilize the fragile economy and after is generates enough growth followed by long term consistent austerity measures.


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Sep 2, 2011

Market Sentiment Review




Recent days all sentiment indicators show oversold markets. There is large level of uncertainty and thus high volatility still shaking markets. Recent rally gave some relief and question is whether it is going to last for a while. Weekly review of the sentiment indicators shows short term market mood and could give us clue for next one. The charts analysed below plot specified indicator on left hand axis and SandP500 index value on right hand.


Total put/call ratio is at one year high. This is bullish signal since the measure is above its +2SD (standard deviation). As seen in mid June extreme levels indicate market bottoms. According to put/call ratio we should be in such at the moment.
Put/Call ratio

After reaching two year peak volatility index started declining. Now at level of 32 markets calculate high possibility of double dip. Levels above 30 are crucial for market confidence, since investors perceive higher volatility with downturn.
Volatility Index

S&P500 relative to its 200 day moving average indicates the spread between mentioned. It is straightforward measure and is positively correlated with actual index move. It shows deviation of the market from its long term trend. On the chart is visible that currently market is 6% under its 200 MA and indicator is under -2SD – extreme negative value signalling oversold market.  
S&P 500 Relative to Its 200-Day Moving Average

Charts source: indexindicators.com

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Sep 1, 2011

September Sentiment



Last week was very volatile for the markets. Obviously the bottom has been formed, at least short term one, since S&P500 returned 9.6% in just 7 days. Right scale of the graph shows the value of the index and the left indicator. The indicator on the chart shows, however, that there are still room for growth after only 29% of companies in the index trade over their 50 day moving average. Values ​​below-1SD (standard deviation) is a signal to buy, as seen in the previous two corrections. This indicator has shown historically that can induce relatively accurate entry levels.

% of S&P 500 Stocks Above 50-Day Moving Average

Still the rally is fragile since investors are cautiously buying after sharp selloff seen previous weeks. Most attractive at the moment are blue chip companies with stable growth prospective. Therefore we can not expect a sharp return rather moderate growth, which will depend mainly on data on employment and unemployment and potential of the world's leading economies to generate growth that can lead us out of crisis.


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