Monday, December 13, 2010

Monday Morning Musings: Sentiment Concerns

The market is higher again in early trade, after Asian markets were up nicely overnight. China soared +2.9% after failing to hike its benchmark rate over the weekend as many had expected. They said they would maintain a strong growth policy despite rising inflation.

The dollar is lower this morning, which has been boosting stocks lately, and is also helping commodities. Oil prices are nearing $90 (currently $89.17), and gold prices are back to $1391.

The 10-year Treasury is up to 3.35%, its highest level since June. And the volatility index (VIX) is down to 16.80, which is its lowest level since April. As you recall, April wasn't the best time to enter the market.

Among the sector ETFs, energy (+1.35%) and materials (+1.07%) are leading the early action, while consumer staples (+0.07%) are lagging.

Trading comment: The ISEE call/put ratio closed at 230 on Friday, after hitting 208 on Thursday. From my limited work, 230 looks like a record close, and it is very rare to find 2 readings above 200. This is just another example of investor sentiment becoming too complacent at this juncture. The Rydex nova/ursa ratio is also rising to levels not seen since April.

We know from past instances of sentiment getting this complacent that it is just a matter of time before the market experiences some sort of correction. So it pays to be on your toes. It could happen tomorrow, or it might not happen until January. But the longer sentiment stays this complacent, the more likely it is that we will get another market correction. Something to factor into the equation and have a game plan for.


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