Market’s Bias Within Range Favors Bulls

July 30, 2015

An Even Battle Between Bulls And Bears?

The S&P 500 made an intraday low of 2039 on March 11, 2015. The intraday high in the current range was made on May 20. Since then, the S&P 500 has traded between 2039 and 2134. The mid-point of the range is 2087.

There Has Been A Clear Bias Within The Range

Has the recent trading range been an even battle between the conviction to own stocks and the conviction to sell stocks? If so we would expect to see about a 50%/50% split between days spent in the top half of the range and days spent in the bottom half of the range. As shown below the bias has been to close in the upper half of the range. The S&P 500 has been within the range for 98 trading days. It closed in the upper half of the range on 66 of those 98 days.

Weekly Picture

Since a daily closing price represents the final outcome between bulls and bears in a trading session, it provides better information than an intraday price. The same can be said for a weekly closing price relative to an intraweek price. The weekly score also says “the conviction to own stocks has been greater than the conviction to sell stocks, even within the context of the recent trading range”.

Investment Implications

Is this analysis a reason to mortgage the house and buy stocks? No, not even close. However, it does represent another piece of data, similar to recent extreme sentiment readings, telling us to keep an open mind about all outcomes, including better than expected outcomes.

Market Odds For September Rate Hike Drop To 0%

July 29, 2015

Market Leans Dovish After Fed Statement

The implied probability of a September rate increase from the Federal Reserve, based on 30-day Fed funds futures prices, dropped to 0% following Wednesday’s dovish policy statement. In recent weeks, the implied probability for a September rate increase was hovering between 17% and 21%.

GDP Coming Thursday

While the market has another big hurdle to cross in the form of the latest reading of U.S. GDP Thursday morning, in addition to Wednesday’s Fed statement, we recently outlined other reasons to keep an open mind about bullish outcomes.

Bull/Bear Guideposts

A few reasonable S&P 500 guideposts relative to improving bullish probabilities include 2096, 2107, 2116, and 2134. Each push above a guidepost level improves the odds for the bullish case. Below these levels, the expression “the market has some work to do” applies. The S&P 500 closed at 2108 Wednesday, above both 2096 and 2107, meaning bulls and bears will be watching 2116 and 2134 in the coming days.

Several Reasons To Remain Open To Bullish Outcomes For Stocks

July 28, 2015

Fear Has Lots Of Company

As we noted in “What Do 1987, 2003, 2009, And 2015 Have In Common?”:

When investor sentiment reaches extreme levels, it can be a contrary indicator for the stock market. For example, the highest bullish reading in the history of the American Association Of Individual Investors (AAII) Sentiment Survey was 75% bulls before the dot-com bubble popped in 2000. To give you a reference point, the average over the life of the AAII survey is 39% bulls. Sentiment readings can also be helpful when they reach extreme levels of skepticism.

The CNN Fear & Greed Index was sitting at an “extreme fear” reading of 7 during Monday’s session. Mid-day on Tuesday it was still sitting at an extremely fearful reading of 15. This type of reading looks nothing like what we would expect to see near a major market peak; we would expect just the opposite…extreme optimism (see the 75% bull reading before the 2000 market peak).

Are There Other Reasons To Keep An Open Mind?

The answer to the question above is “numerous”. In addition to the CNN Fear & Greed Index, a record for investor skepticism, dating back to after the 1987 stock market crash, was recently broken. When markets consolidate, it speaks to indecisiveness or a more equal battle between bulls and bears. We are all familiar with the expression “the market needs to consolidate its gains”. Thus far, 2015 has produced a rare pattern of consolidation similar to ones not seen since 1904, 1934, and 1994. As noted in the table below, all three historical periods of consolidation were followed by big gains in the stock market.

Want More Details?

This week’s video provides some additional insight into the “reasons to keep an open mind about bullish outcomes” table shown above. It also covers recent observable damage to the bullish case.

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How Can We Use All This?

Any data that tells us to keep an open mind about better than expected outcomes must be confirmed by the stock market; something that has not happened yet. For example, if the stock market is to rally for the next few months in a surprising manner, that is not possible as long as the S&P 500 fails to make a higher high above 2,134. Our market model does not make decisions based on what “may or may not happen”. Therefore, the only real value to the table and video above is to help us remain open to and prepared for all outcomes (bullish and bearish). A few reasonable S&P 500 guideposts relative to improving bullish probabilities include 2096, 2107, 2116, and 2134. Each push above a guidepost level improves the odds for the bullish case. Below these levels, the expression “the market has some work to do” applies.

Most Recent Comments Via Twitter

July 27, 2015

You can access them here (@CiovaccoCapital). You do not need to know anything about Twitter to view our comments or use the links to view charts.

Bearish Cracks vs. “Be Patient” Facts

July 25, 2015

Topics Shown Below Video Player

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  1. Last 28 Months – Fed Policy Side Effects?
  2. Observable Deterioration
  3. “Be Patient” Evidence
  4. After A Similar Consolidation Period In 1904, What Happened?
  5. After A Similar Consolidation Period In 1934, What Happened?
  6. After A Similar Consolidation Period In 1994, What Happened?
  7. Did Sentiment Set Another Skeptical Record?
  8. Weak Transportation Average – Showstopper?
  9. Weak Breadth – A Bull Killer?
  10. Is The Fractal Analysis Still In Play?

What Do 1987, 2003, 2009, And 2015 Have In Common?

July 21, 2015

“Stocks Are Going Nowhere In Next Few Years”

If you have been involved with the markets over the past thirty years, you may find the sentiment statistics described in this article as the most surprising you have ever seen. Recent investor sentiment readings have reached levels of skepticism not seen since 1987, 2003, and 2009. If you know your market history, you also know those are the three best buying opportunities over the last 30 years.

Sentiment Can Be Helpful Near Extremes

When investor sentiment reaches extreme levels, it can be a contrary indicator for the stock market. For example, the highest bullish reading in the history of the American Association Of Individual Investors (AAII) Sentiment Survey was 75% bulls before the dot-com bubble popped in 2000. To give you a reference point, the average over the life of the AAII survey is 39% bulls. Sentiment readings can also be helpful when they reach extreme levels of skepticism, which is the topic we will explore in more detail below and tie it into the present day.

This Has Happened Only Three Times Since 1995

The eight-week moving average for percent bulls in the AAII Sentiment Survey recently dropped to an extremely low level in 2015, a level seen only two other times since 1995. The other two times were two of the best periods to invest in the last thirty years; early in 2003 and early in 2009.

In the chart above it is important to note we did not pick the comparison periods; the data selected the periods. The comparison is based on facts, not opinions. Since 1995, the recent reading has been seen only three times; 2003, 2009, and 2015.

Was 2003 A Good Time To Invest?

With similar skeptical sentiment to what we have seen recently in 2015, the spring of 2003 offered a great investment opportunity from a short-term perspective. As shown in the chart below, despite the “stocks are going nowhere” sentiment of the day, the S&P 500 rallied from 800 to over 1100 in less than a year (a gain of over 37%).

2003: From A Longer-Term Perspective

If you would have asked the average investor in 2003:

Is it possible for stocks to rally sharply over the next four years?

A common answer, based on the sentiment of the day, might have been “no way, not going to happen”. It did happen as shown in the 2003-2007 S&P 500 chart below:

Was 2009 A Good Time To Invest?

With similar skeptical sentiment to what we have seen recently in 2015, the spring of 2009 offered a great investment opportunity. In the wake of extreme investor skepticism, the S&P 500 rallied from the March 2009 intraday low of 666 to over 1200 in a little over a year.

What About Weak Market Breadth?

Regardless of what recent sentiment says from a probability perspective, you may feel it does not matter since market breadth in 2015 has been noticeably weaker. This week’s video examines the questions:

How long and how far can stocks rise with weakening market breadth?…Is it a showstopper?

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Easy To Understand Skepticism After 1987 Crash

For those not familiar with Black Monday, the S&P 500 dropped over 20% in one day. Therefore, it is very easy to understand investor skepticism reached extreme levels after the 1987 stock market crash. What is surprising is that 2015 investor skepticism has reached an extreme level not seen since the period following the 1987 crash. From MarketWatch:

For the past 15 weeks, neutral sentiment in the AAII Sentiment Survey has registered above 40%, tying a record set in the wake of the Black Monday market crash of 1987. Charles Rotblut, editor of AAII Journal, has noted that unusually high readings of neutral sentiment typically coincide with better-than-average returns for the S&P 500 Index

Similar Sentiment Post-Black Monday

If the record for weeks above 40% neutral sentiment is shared by the period following the 1987 crash and 2015, a logical question to ask is what happened next in 1987? The answer is stocks went up, not down.

1987: How About From A Longer-Term Perspective?

With extreme levels of investor skepticism, those who stepped outside of the 1987 groupthink category and remained with the stock market were handsomely rewarded. If we asked someone after the 1987 crash “what are the odds that stocks rally sharply over the next thirteen years”, we may have been hit with a “have you lost your mind?” response. Despite the widespread skepticism about stocks, the S&P 500 came off the 1987 lows and rallied for the next thirteen years.

2015: No Way Stocks Can Rally!

Things are awful in 2015: Apple is down after hours, Greece is still a mess, the Fed is getting ready to raise rates, and earnings have been weakening. There is no possible way that stocks can rally, right? The market will decide, but things looked horrible after the 1987 crash, after the dot-com bust, and after the financial crisis as well. Did stocks tank in those three cases with similar sentiment to the present day? No, stocks did not follow the path that most anticipated. Instead of falling, they not only rose, but rose significantly.

But, 2015 Is Different From 1987, 2003, and 2009

Yes, that is true. The same comment applies to all historical analysis (bullish and bearish). This article has looked at two indisputable facts:

  1. The eight-week moving average for percent bulls in the AAII Sentiment Survey recently dropped to an extremely low level in 2015, a level seen only two other times since 1995. The other two times were two of the best periods to invest in the last thirty years; early in 2003 and early in 2009.
  2. For the past 15 weeks, neutral sentiment in the AAII Sentiment Survey has registered above 40%, tying a record set in the wake of the Black Monday market crash of 1987; also one of the three best times to invest in the last thirty years.

We did not cherry pick the data. The data picked the periods; 2015, 2009, 2003, and 1987.

AAII Survey Not The Only Evidence

We have seen similar and extreme bearish sentiment readings from other sources. For example, the CNN Money Fear & Greed Index was at an “extreme fear” reading of 22 a week ago.

Investor’s Intelligence Survey Also At An Extreme Level

Ryan Detrick points out in a July 19 article that the Investor’s Intelligence Survey recently hit an extreme and rare correction percentage greater than 40%, meaning over 40% of newsletters believe a correction is coming in the stock market. Ryan Detrick’s article shows S&P 500 returns have been favorable following such an extreme “correction” reading. From Investor’s Intelligence:

We study over a hundred independent market newsletters and assess each author’s current stance on the market: bullish, bearish or correction. Since we have had just four editors since inception, there has been a consistent approach to determining each advisors stance and his prior viewpoint.

How Is This Analysis Helpful?

From our perspective, this analysis is not about predicting what stocks will do next. The value is simply that it helps us keep an open mind about all outcomes, bullish and bearish. If we have an open mind, we can put plans in place for bullish and bearish scenarios. Experience says it is dangerous to decide in advance what the market is going to do, since it often does just the opposite. For now, the primary trend in stocks remains up and the S&P 500 is stuck in the same range it has been for months. If a correction is on the way, price will not miss it. We are happy to adjust if and when needed. Given what we know today, the evidence still calls for a equity-heavy allocation.

Recency Bias May Be A Big Factor In 2015

Why are investors so skeptical today? There are many factors in play, but one of them may be recency bias. Investors “have seen this before”.

Stocks rallied into the 2000 high, and then crashed. That was followed by a rally into the 2007 highs; that too, was followed by a stock market crash. From the 2009 lows, stocks have rallied and now it must be time for them to crash again, right? History and the charts say that assumption may turn out to be inaccurate. Only time will tell, but a detailed analysis, “Stocks Could Surprise Significantly On The Upside In The Next Fifteen Years”, aligns with the sentiment analysis presented here and tells us to keep an open mind about all outcomes.

Market Breadth And The Weight Of The Evidence

July 18, 2015

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Video Will Be Posted Saturday Morning

July 17, 2015

Many interesting charts and will cover market breadth.

Most Recent Comments Via Twitter

July 15, 2015

You can access them here (@CiovaccoCapital). You do not need to know anything about Twitter to view our comments or use the links to view charts.

What Are The Odds Of A Bullish Resolution?

July 11, 2015

Video looks at:

  1. Support (numerous markets)
  2. Trends vs. patience
  3. European bond yields (fear)

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