Investor Sentiment Polls Show Serious Conflict

Anyone wanting to ‘massage’ data is in heaven right now.

Bulls can point out that retail investors, polled by the American Association for Individual Investors (AAII), are very bearish (bullish for stocks).

Bears can point out that investment advisors and newsletter writers, polled by Investors Intelligence (II), are very bullish (bearish for stocks).

There’s a stat for everyone.

In fact, the spread between the AAII and II group is at the top end of its range, and the highest it’s been since July 2014.

Perhaps that’s the graph we should focus on. The chart below does just that:

The red lines indicate that extreme viewpoint differences, like we’re seeing right now, led to some short-term S&P 500 (NYSEArca: SPY) weakness in the past.

A long-term analysis of the opinion spread is available here: Retail Money is Much More Bearish Than Investment Pros

What’s the lesson? Don’t trust anyone who says stocks must go up or down, because investor sentiment is bullish/bearish this or that.

 

The fact is, that some of the individual sentiment extremes offset each other.

My March Sentiment Picture (part of the Profit Radar Report), which graphs six different sentiment gauges, concluded that: “There are no real extremes, and sentiment doesn’t foreshadow any large and sustainable moves in the immediate future.”

The ‘immediate future’ has come and gone, but the trading range remains.

A comprehensive analysis shows that overall sentiment is currently slightly more bullish than bearish. If I had to illustrate sentiment on a scale from 1 – 10 (10 being most bullish), we’d be at a 6 or 6.5.

Simon Maierhofer is the publisher of the Profit Radar Report. The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013 and 17.59% in 2014.

Follow Simon on Twitter @ iSPYETF or sign up for the FREE iSPYETF Newsletter to get actionable ETF trade ideas delivered for free.

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The ‘Smart Dumb Money’ is Market-Top-Worthy Bullish

Stocks caught a decent bid on strong breadth on Monday, but one accurate ‘dumb money’ indicator hit bullish extremes not seen since early 2011. This is a serious red flag as the featured chart clearly shows.

I always follow multiple indicators, especially when we’ve got ‘skin in the game.’

As per the August 28 Profit Radar Report, we went long the S&P 500 at 1,642.

Our up side target was an open chart gap at S&P 1,685. Open gaps pull price like a magnet. The S&P 500 is within striking distance of the open gap, and according to option traders risk is rising.

On Tuesday the CBOE Equity Put/Call Ratio dropped to 0.45, the lowest reading since early 2011 (blue line). This means that option traders are buying more than two calls for every put, a bullish extreme.

The 10-day SMA for the put/call ratio is at 0.566, the lowest since the May 2012 high.

What does such a low equity put/call ratio mean? 

Back in April 2010 the put/call ratio fell as low as 0.32 and I sent out the following warning and explanation to subscribers on record:

“The put/call ratio can have far reaching consequences. Protective put-buying provides a safety net for investors. If prices fall, the value of put options increases balancing any losses incurred by the portfolio. Put-protected positions do not have to be sold to curb losses. At current levels however, it seems that only a minority of equity positions are equipped with a put safety net. Once prices do fall and investors get afraid of incurring losses, the only option is to sell. Selling results in more selling. This negative feedback loop usually results in rapidly falling prices.”

Just a couple of weeks later the S&P 500 (SNP: ^GSPC), Nasdaq, and Dow Jones spiraled lower in what was later dubbed the ‘Flash Crash.’

Obviously, the current reading is not as bad as in April 2010, but as the chart below shows it is at a level that’s led to lower prices all but once (with or without delay) since 2011. The one exception occurred in January 2012.

What to Do?

The Nasdaq (Nasdaq: QQQ) has rallied to new highs. This seems bullish, but seasonality for AAPL is soon turning bearish. The S&P’s up side target for the rally from the August 28 low – 1,627 for the S&P 500, 163 for SPY (NYSEArca: SPY) – is just a few points away. In short, risk is rising.

This doesn’t mean that prices can’t move any higher, but it’s prudent to lock in gains or raise stop-loss levels.

A stunning long-term outlook that puts the current rally into context is available to subscribers of the Profit Radar Report.

Simon Maierhofer is the publisher of the Profit Radar Report.

Follow Simon on Twitter at iSPYETF

Contrarian Signal? Investment Advisors are Dangerously Bullish

Investors blindly following the crowd often end up getting slaughtered like a herd of sheep. That’s the very premise of contrarian signals. So what is the crowd doing now? A look at investment advisor sentiment provides a glimpse.

Investors Intelligence (II) just released the latest results of its sentiment poll. Every week II polls investment advisors and newsletter writing colleagues.

This ‘smart money bunch’ works surprisingly well as an indicator, contrarian indicator that is.

When the II crowd is excessively bullish, it’s generally time to hover around the exit. Conversely it’s usually a good time to leg into stocks when there are plenty of II bears.

Without further ado, here are this week’s results. The chart below plots the S&P 500 against the percentage of bullish advisors polled by II.

In a nutshell, 51.6% of advisors are currently bullish. This is below this year’s May 21 high of 55.2% (which foreshadowed a shallow correction).

The red lines highlight the effects prior readings above 54% had on the S&P 500 (NYSEArca: SPY). There were some great signals, but there were also some spectacular misses.

QE liquidity has certainly skewed the contrarian accuracy of this particular indicator.

The Commitment of Traders (COT) report for the S&P 500, Dow Jones Industrial, and Russell 2000 is fairly neutral.

However, commercial traders (considered the ‘smart money’) are rather bearish on the Nasdaq-100 (Nasdaq: ^IXIC) while large speculaters (the ‘not so smart money’) are predominantly bullish. COT sentiment for the Nasdaq suggests that gains may be limited.

In this QE bull market, I always take a look at a dozens of sentiment and actual money flow indicators.

What’s the message of other sentiment indicators?

I have found that sentiment surveys (such as II) combined with option traders sentiment (such as put/call ratio), and a few other off the wall (but accurate) sentiment gauges, provide a good pulse on the market.

 

Bullish vs Bearish Indicators – Who Has the Upper Hand?

Recent articles highlighted various individual indicators. Some were bullish, but the majority was bearish. This article reviews previously discussed signals and boils them down to one outlook.

In recent weeks we’ve examined various indicators, studies, gauges and seasonality. Some bullish, some bearish. But what is the balance? Does the weight of evidence suggest higher or lower prices?

Listed below is a summary of articles designed to help form an educated and balanced opinion. Articles are categorized as bullish or bearish based on their implications. >> click here to view all the links to prior articles.

Bearish:

April 23: Dow 16,000! Headline Indicator Sways Into Bearish Territory
Barron’s Big Money Poll delivered the most notable sentiment extreme in 2013. Professional investors’ record bullish outlook is bearish for stocks.

April 17: Did ‘Sell in May and Go Away’ Arrive Early?
Based on consistent seasonality, the March 31, Profit Radar Report suspected a mid-April and May double top. The mid-April high is in and the ‘double top’ appears to be in the making.

April 16: From Gold Glitter to Jitter: An Explanation for Gold’s Historic Decline
Falling precious metals prices often foreshadow weakness for stocks.

April 10: Bearish Buying Climaxes are Adding Up for Stocks and Even the S&P 500
Buying climaxes are a sign of distribution, which is bearish for stocks. Discussed in detail was a buying climax in particular for the S&P 500. The most likely outcome was a delayed (1-2 weeks) decline, which is what occurred.

April 4: Yield Spread Between Junk Bonds and Treasury Bonds Hits Alarming Level
The ‘risk on’ trade has reached a level that’s caused trouble in the past.

April 1: AAPL, GOOG, AMZN and MSFT – Tech Sector Giants Turn Laggards
The lagging behavior and lack of leadership by ‘Big Tech’ suggested that the rally is starting to run out of steam.

Bullish/Neutral:

April 17, Profit Radar Report: “There are open chart gaps at 2,850 for the Nasdaq-100 (and 1,588 for the S&P 500). In recent years all chart gaps have acted as magnet and the Nasdaq-100 (and S&P 500) should come back to close those gaps. We’ll close our short positions at 2,740 – 2700 (and around S&P 1,540).”

April 19: Weekly ETF SPY: Russell 2000 ETF – IWM
The Russell 2000 and S&P 500 bounced off major support. That’s bullish … as long as support holds.

April 17: Despite Extreme VIX Movements, Option Traders are ‘Lukewarm’
Option trader sentiment has established a solid track record as contrarian indicator. Contrary to the deeply complacent readings of the VIX, other option-based indicators (like the SKEW index) aren’t even close to bullish extremes.

April 11: Retail Investors Turn Record Bearish as S&P 500 Climbs to All-time High
The most volatile of sentiment gauges fell to a bearish extreme. Viewed in isolation that’s bullish for stocks, but only viewed in isolation.

The April 17 VIX/SKEW article summarized the overall situation as follows:
“To an extent, option-trader sentiment is in conflict with other bearish sentiment extremes discussed recently. When sentiment indicators conflict, technical analysis and support/resistance levels become even more valuable.”

Technicals highlighted key resistance at 1,593 and key support at 1,538. As per the Profit Radar Report, we went short the S&P 500 once the S&P 500 dropped back below 1,590 (April 12) and covered our short positions at 1,540 and 1,562 (April 18 and April 22).

Based on the weight of evidence, there will be a short windon with a low-risk opportunity to go short.

How to go short with minimal risk is revealed in the Profit Radar Report.

Dow 16,000! Headline Indicator Sways Into Bearish Territory

Is Dow 16,000 possible. Sure. It’s less than 8% away from the April all-time Dow high. But, the mere fact that Dow 16,000 is predicted by one of the most followed money polls, suggests that (best case scenario) getting there won’t be easy.

How do fish get caught? They open their mouth. How do investors get hosed? They follow the crowd.

This rather reliable rule of thumb (don’t follow the crowd) has been distorted by the Fed’s quantitative easing. Yes, prior to QE, investor sentiment used to be a rather reliable contrarian indicator.

Nowadays some sentiment indicators have to be taken with a grain of salt and subjected to additional scrutiny as the Fed has taken the edge off extreme readings and their contrarian implications.

Personally, I like to take a look at the composite sentiment picture made up of sentiment polls, money flows and my own personal headline assessment.

My headline assessment includes projections like last weekend’s Barron’s “Dow 16,000” cover. Here’s what Barron’s wrote:

The stock market isn’t the only thing that has set records this spring. Barron’s semiannual Big Money poll of professional investors also is setting a record — for bullishness, that is. In our latest survey, 74% of money managers identify themselves as bullish or very bullish about the prospects for U.S. stocks — an all-time high for Big Money, going back more than 20 years. What’s more, about a third of managers expect the Dow Jones industrials to scale the 16,000 level by the middle of next year.”

Barron’s publishes a magazine to make money and to make money you need to write about stuff people like to read. Bullish news does the trick right now. This suggests that a great many of investors are back into stocks, now hoping for higher prices and looking for ‘evidence’ confirming their bias.

That’s not good news for the bulls. In all fairness, it has to be said that Barron’s has gotten their forecasts right a few times recently.

In October 2012, Barron’s predicted new highs and the February 9, 2013 front cover shouted: “Stock Alert! Get ready for a record on the Dow,” and rubbed in the four words every investor likes to read. “We told you so,” and continued: “In October, we predicted the Dow would pass its 14,165 record by early this year. Now we’re just 1% short. Expect a breakthrough soon.”

But Barron’s had its ‘prime contrarian indicator moments,’ such as: “Is $5000/ounce the new target in gold’s run?” in August 2011 or its ueber bullish 2007 big money poll.

It has to be noted that despite bullish sentiment poll results earlier this year, the media was extremely bearish. The March 10, 2013 Profit Radar Report commented as follows on the lack of media enthusiasm:

The Dow surpassed its 2007 high and set a new all-time high last week, but investors seem to embrace this rally only begrudgingly and the media is quick to point out the ‘elephant in the room’ – stocks are only up because of the Fed. Below are a few of last week’s headlines:

CNBC: Dow Breaks Record, But Party Unlikely To Last
Washington Post: Dow Hits Record High As Markets Are Undaunted By Tepid Economic Growth, Political Gridlock
The Atlantic: This Is America, Now: The Dow Hits A Record High With Household Income At A Decade Low
CNNMoney: Dow Record? Who Cares? Economy Still Stinks
Reuters: Dow Surges To New Closing High On Economy, Fed’s Help

We know this is a phony rally, but so does everyone else. We know this will probably end badly eventually, but so does everyone else. The market likes to fool as many as possible and it seems that overall further gains would befuddle the greater number. Excessive optimism was worked off by the February correction. Sentiment allows for further gains.”

From March 11 – April 11 the S&P 500 gained another 46 points. By April 11, the media started to embrace the idea of rising prices more fully:

Bloomberg: S&P 500 climbs to record on stimulus, earnings optimism
Reuters: Dow, S&P close at record highs in broad rally

In my admittedly unscientific estimation of headline sentiment, the media is still not as enthusiastic as it was in late 2010 or prior to the 2000 or 2007 highs.

Barron’s Big Money Poll results are nevertheless concerning and combined with weak seasonality, waning market breadth will probably lead to lower prices.

Dow 16,000 later on in 2013 doesn’t seem so far fetched though. Don’t get me wrong, now is not the time to be short (we went short at S&P 1,590), but I wouldn’t write off Dow 16,000 unless key support is broken.

Exactly How Worrisome is Bullish Sentiment?

Contrarian investors love to use sentiment as a general overbought/oversold measure. There’s no denying that Wall Street and Main Street have surrendered to the allure of higher prices, but just how much of a threat does bullish sentiment pose right now?

If you have skin in the game, you probably know something about the game.

If you have money invested in stocks, you probably have noticed the increasingly bullish forecasts.

Sentiment is a valuable contrarian indicator, but exact danger levels are difficult to quantify. How worrisome is the current bullishness?

Inverse Contrarianism

We saw a rare phenomenon in early January. Investors turned bullish, but the media publicized the bearish implications of bullish investors.

The January 13, Profit Radar Report pointed out the following: “Last week’s most notable development is the uptick in investor optimism. This normally contrarian development is tapered by the unusual media attention.

A headline on the Yahoo!Finance homepage reads: ‘Is the crowd’s cheery mood reason to fear the rally’s end?’ CNBC published articles such as: ‘Why the VIX’s recent plunge may be bad for stocks’ and ‘Where is the wall of worry?’

A contrarian indicator with so much mainstream attention is not contrarian anymore. Hopefully a continued move (perhaps through a laborious process) to around 1,490 will silence the contrarian publicity and better align overall sentiment with our upcoming technical short setup.

Market Silenced the Media

The S&P 500 has rallied 40 points since mid-January and did indeed silence suspicious media outlets.

Now we see headlines like these:

CNBC: Market Bears on The Brink: ‘I Can’t Fight Anymore’
CNBC: S&P 1,500: Last Barrier Before New Record
Reuters: The Great Rotation: A Flight to Equities in 2013
Bloomberg: Nouriel Roubini Faces the Music: Did Dr. Doom get it Wrong?

This is the most bullish I’ve seen the media in well over a year, but admittedly my self-composed “Headline Sentiment Index” lacks the trackability needed for a good indicator.

Other sentiment gauges do have a long track record and the Profit Radar Report takes a detailed look at four of them every month.

Below is the January 2013 Sentiment Picture (the Profit Radar Report prepares one detailed Sentiment Picture per month for subscribers on record).

Like gauges in your car’s instrument cluster, the monthly Sentiment Picture provides a quick summary of what’s going on.

Illustrated are the CBOE Volatility Index (VIX), Equity Put/Call Ratio, the percentage of bullish advisors/investors polled by Investors Intelligence (II), and the American Association for Individual Investors (AAII).

Shaded red areas denote the minimum/maximum sentiment extremes seen at prior highs.

Here’s a quick rundown of the four indicators:

The VIX is in danger territory (red box).

The Equity Put/Call Ratio is not per say in danger territory, but not far away from where a market top could be.

The percentage of bullish advisers polled by II is getting in the red danger zone.

The percentage of bullish investors polled by AAII is in the red zone.

Summary

Investor enthusiasm is high enough to where it could cause a sizeable correction, but not extreme enough to force a turnaround. A break below support would probably elicit more selling.

And one thing is for sure, there are plenty of buyers that could turn into sellers and drive prices lower. The Profit Radar Report pinpoints the support levels that, once broken, will cause more selling.

S&P 500: Bearish RSI Divergence Waives Red Flags

The December 2, Profit Radar report predicted new recovery highs, but warned that: “Any new recovery high marked by a bearish price/RSI divergence could mark the end of this rally.” That’s exactly where we’re at now.

Research studies show that investors as a group buy high and sell low. The media fuels this kind of crowd behavior, trashing stocks near a bottom and hyping them up near the top.

The “headline index” – a fictitious index based on a not entirely worthless evaluation of media sentiment – depicts a media more cheery than any other time in 2012. The upside is limited whenever the media is implying a sustainable rally.

But this article isn’t about sentiment or the media; it’s about a technical divergence. One that incidentally runs contrary to the media’s blissful mood.

RSI Basics

The Relative Strength Index (RSI) is a very basic and commonly used momentum indicator. I usually don’t subscribe to popular indicators (the more folks use any given indicator the less effective it is), but RSI just happens to work very well for me (perhaps because I use an unusual setting to make it more ‘special’).

My simple theory is to look for unconfirmed highs or lows. Any new price high/low unconfirmed by a new RSI high/low is a bearish/bullish divergence. This theory works at multiple time frames. I like to use it for spotting highs/lows that last for weeks or months.

This simple strategy has helped me to identify the May 2011 top and October 2011 and June 2012 lows.

Bearish RSI Divergence

The chart below is visual evidence that every bigger top since 2010 (vertical dashed red lines) sported a bearish RSI divergence (new price high without new RSI high).

The September 14 high fooled me, because there was no bearish divergence (dashed green line). Due to the lack of divergence, I refused to abandon my outlook for new recovery highs above 1,475, which at the time was quite unpopular.

Via the September 30, Profit Radar update I stated that: “The September 14 recovery highs for the S&P, Dow, Russell 2000, and XLF were all accompanied by new RSI highs. It would be rare for stocks to form a long-term peak without a bearish price/RSI divergence. Because of this lack of divergence we expect new recovery highs.”

The December 2, Profit Radar update again noted that: “The decline from September 14 – November 16 was a correction on the S&P’s journey to new recovery highs. This scenario is supported by the lack of bearish price/RSI divergences at the September 14 high, continuous QE liquidity, and bullish seasonality. There is no specific target, but any new recovery high marked by a bearish price/RSI divergence could mark the end of this rally.”

Something’s Changed

As of last week, the S&P 500 recorded new recovery highs above 1,475 void of a new RSI high. In itself, that’s not a sell signal, but it’s a red flag.

As with any indicator, RSI divergences become more potent when confirmed by other technical indicators or support/resistance levels.

I was excited to discover two important resistance levels not far above current trade. In fact, one of the resistance levels caused a major S&P 500 reversal in May 2011, one that shaved nearly 300 points off the S&P.

It can be treacherous to buck a QE-stock market on a mission, but this major inflection point along with the bearish RSI divergence and increasingly bullish sentiment suggests definite caution ahead.

The Profit Radar Report reveals the key resistance level (and target for this rally) along with conservative and aggressive trade recommendations to take advantage if this strong inflection point.