Surprising Bearish Sentiment Extremes are Popping Up

Stocks have been trading in a tight range near all-time highs, but an increasing number of investors wouldn’t want to touch stocks even with a ten-foot pole.

This is somewhat unusual, but is it bullish for stocks?

Here are three sentiment gauges worth noting, and how to make sense of them:

  1. The percentage of retail investors polled by the American Association for Individual Investors (AAII) has shriveled to the lowest reading since April 2013.

    The chart below plots the S&P 500 (NYSEArca: SPY) against the % of bullish investors. The red lines mark similar levels, and how such readings affected the S&P 500.

  2. The four biggest index ETFs – S&P 500 (NYSEArca: SPY), Nasdaq QQQ ETF (Nasdaq: QQQ), iShares Russell 2000 (NYSEArca: IWM), Dow Jones Diamonds (NYSEArca: DIA) – suffered $16 billion worth of withdrawals in April, one of the worst months (for index providers) on record.
  3. According to the Commodity Futures Trading Commission’s (CFTC) commitment of traders (COT) report, the ‘smart money’ has reduced short equity exposure while ‘dumb money’ is selling stocks.

When viewed in isolation, the above-mentioned sentiment developments are bullish for stocks. However, they are contradicting the bearish message conveyed by seasonality and market breadth.

For now, we probably shouldn’t blow such bearish sentiment messages out of proportion. Stocks are still stuck in a range, and the contradiction between indicators may just perpetuate the range, or stretch it.

I would watch S&P 2,118 as line in the sand. A break above 2,118 would likely reel in buyers. Although it may not be long before ‘buyers remorse’ sets in again.

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.

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Crude Oil Speculators Are All-time Bullish – Will This Sink Oil Prices?

Large crude oil speculators have amassed a record amount of long crude oil positions. This may mean that there are few buyers left, which may be troublesome for oil prices. Furthermore, oil prices are at technical crossroads.

The latest Commitment of Traders (COT) report shows that large speculators have never been more bullish on crude oil and are holding an all-time high exposure to the ‘black gold’ (hopefully it won’t disappointment them like actual gold).

The Commodity Futures Trading Commission (CFTC) COT reports holdings data for various energy contracts and most of them show large speculators are record long.

What does that mean for oil and gas prices?

There are two key components to the short-term oil outlook. Both of them are illustrated in the chart below, which plots WTI crude oil prices against the COT large speculator data.

When large speculators were ‘all in’ in 2011 and 2012 oil prices corrected. Not immediately but inevitably.
The red trend line magnifies the potential impact of the current sentiment extreme. Oil prices are at technical crossroads as trade hovers around this support/resistance level.
ETFs that are affected by this sentiment/technical analysis combo include:
United States Oil Fund (NYSEArca: USO)
PowerShares DB Oil Fund (NYSEArca: DBO)
Ultra DJ-UBS Crude Oil ProShares (NYSEArca: UCO) – 2x leveraged long ETF
UltraShort DJ-UBS Crude Oil ProShares (NYSEArca: SCO) – 2x leveraged short ETF
The trend line suggests that bullish and bearish forces are fighting a battle over short-term supremacy right around the 103 level.
As long as trade stays above trend line support, higher prices deserve the benefit of the doubt, but sentiment suggests that the we should see a notable correction eventually.
There’s one support level that absolutely must hold and a price target that – if reached – should be very damaging to the stock market.
A more detailed analysis of oil titled ‘Will $100+ Oil Be a Problem For Stocks & The Economy” offers an insightful longer-term outlook for oil along and reveals key support and resistance levels.