Favorable Sentiment for a 4th Quarter Rally

Fri, Oct 31, 2014 - 10:28am

The following is an excerpt from our October 30th Investor Sentiment Survey. Investor Sentiment Survey, one of 8 different reports that we provide for subscribers at various intervals throughout the month, is a monthly analysis of a broad list of both asset flow- and survey-based measures of professional and retail investor sentiment which focuses on their directional implications for the major areas of the U.S. financial markets.

From our September 11th Investor Sentiment Survey: “…the collective message of these data is that U.S. stocks can still be traded from the long side on a near term week-to-week basis, but be aware of the market’s vulnerability to an upcoming standard 10% correction”

Since that report the bellwether S&P 500 (SPX) first rose by an additional 1% into the September 19th high before declining by 10% into the October 15th low.

In today's report we display and discuss the latest investor sentiment data according to surveys of futures traders, brokerage and advisory firms, and active Registered Investment Advisors (RIAs), plus the latest money market asset flows. These data collectively suggest favorable conditions for a 1-2 month U.S. stock market advance to begin from at or near its current level, but also warn that a deeper decline may still be on the horizon by early 2015.

Chart 1 measures investor sentiment according to futures traders via a daily survey of their collective bullishness on the market-leading S&P 500 (SPX), which is plotted by the blue line in the lower panel.

The highlighted area shows that these near to intermediate term trend followers are currently rising out of historic least bullish extremes of just 21% or less which, as a contrary indicator, has either coincided with or closely led every important bottom in SPX (upper panel) since 2010.

Chart 2 measures investor sentiment according to a daily survey of active Registered Investment Advisors (RIAs) via the NAAIM (National Association of Active Investment Managers) Exposure Index, which is plotted since 2008 by the blue line in the lower panel. The NAAIM Exposure Index represents the average weekly exposure to U.S. Equity markets reported by their membership.

The highlighted area shows that these intermediate term-oriented professional trend followers are also rising from an historic least bullish extreme on U.S. equities, of just 14% or less, one which has previously coincided with important market bottoms in the S&P 500 (upper panel) in October 2011, June 2010, and November 2008. We view this metric as corroborating evidence that trend following investors are currently too negative on the U.S. stock market, which history shows is precisely when meaningful bullish price reversals often begin.

Chart 3 measures investor sentiment according to mutual fund asset flows via our own metric that measures the velocity of investor assets into and out of the Rydex Money Market Fund (RYMXX). We do this by calculating the daily percentage that these assets are either above or below their 50-day moving average, which is plotted by the blue line in the lower panel (inverse scale).

The highlighted area in the chart points out that the velocity of assets defensively moving into the money market is currently at a multi-year most fearful extreme, one that the green vertical highlights between both panels show — as a contrary indicator – has previously coincided with bottoms in the S&P 500 (upper panel) in August and February 2014, June 2013, and November 2012. This metric provides more evidence, from a completely different source, of favorable investor sentiment for another similarly important U.S. broad market bottom to emerge now.

Chart 4 measures investor sentiment according to the intermediate to long term investment time horizon of brokerage/advisory firms and commodity funds via the daily Market Vane Survey of their collective bullishness on the market-leading NASDAQ 100 (NDX), which is plotted since 2004 by the blue line in the lower panel.

The declining red arrow in the lower right edge of the chart shows that these professional trend followers are retracting from an early September most bullish extreme of 79% bullish or greater, but are currently only about halfway to oscillating back to opposite least bullish extremes of 51% that have coincided with literally all of the important bottom in NDX during this period. This metric suggests that, from a longer term 1-2 quarter perspective, the current September decline in the U.S. broad market may only be around halfway completed.

To be continued…

Technician John Kosar: Long-Term Trend Remains Favorable

For further information, including a sample copy of the entire report, contact us at sales @ asburyreearch.com or by calling 1-888-960-0005.

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About the Author

Director of Research
John [at] asburyresearch [dot] com ()