Does The Rally Have Legs?
A colleague of mine on TheStreet.com did a nice job summing up what has been driving this selloff. The deleveraging of the carry-trade (borrowing at low rates (Japan)) and commodity frenzy has weighed on all asset classes around the globe. These days, it seems all asset classes are more highly correlated, and as such no one escapes unscathed. So it starts in one place (commodities), hits emerging markets, and quickly washes up on our (U.S.) shores as well.
But I come back to the fact that I don't think sentiment has ever been this bearish when the markets are topping. The sentiment indicators are as bearish now as they were at the bottom of the bear market. I just don't think it works that way.
The Investment Advisor surveys (spread between bulls & bears) are at their lowest levels since early 2003. The 10-day CBOE put/call ratio is higher than it has ever been. Ditto for the Rydex Ursa/Nova ratio, which measures assets flowing into the inversely correlated Rydex funds.
Now you could argue about the huge increase in the number of hedge funds as skewing the put/call ratios, but we're still talking about real money on the line. These last two indicators represent real money bets, and if and when those bets starts showing losses, they will provide plenty of angst to investors, and create upside pressure in the markets. When I hear talk of 'the mother of all short-covering rallies', I can clearly envision it.
To go along with the sentiment indicators, the market is also now oversold on some of the longer-term measures (stochastics, etc.). We haven't had that until now, so the markets now have a longer-term oversold condition to help the bottoming process. Of course, price and volume are the primary indicators, so we need to see some positive sessions there (read: accumulation).
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posted by J. Kahn @ 10:25 AM
2 comments
2 Comments:
Sentiment can be misleading and I only use it as a secondary indicator. The investor's intelligence number nailed the tops of several bear market rallies between 2000 and 2003. But after the final and real turnaround of the market it signalled overly bullish sentiment way too early and stayed that way.
I admit that negative sentiment readings are more robust than bullish ones.
I often write that sentiment is a secondary indicator, so I agree on that.
You also bring up a good point about bearish sentiment doing a better job of highlighting bottoms. Market tops tend to be longer processes, and much harder to time.
So I try to pay more attention when bearish sentiment is reaching extremes. When that coincides with an oversold market, you can usually start loading up on the long side.
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