econintersect.com
       
  

FREE NEWSLETTER: Econintersect sends a nightly newsletter highlighting news events of the day, and providing a summary of new articles posted on the website. Econintersect will not sell or pass your email address to others per our privacy policy. You can cancel this subscription at any time by selecting the unsubscribing link in the footer of each email.



posted on 29 November 2016

Investor Sentiment Warning

Written by

Macro Tides Technical Review 28 November 2016

Sentiment Issues a Warning

Last week I noted that sentiment had jumped significantly from before the election through November 15. Since the market had continued to climb after November 15, I thought it was probably a safe bet that bullishness had increased further. It did. The percent of bulls in the weekly American Association of Individual Investors survey rose to 49.9% bulls as of November 22, the highest in two years, and up from the 23.6% bulls registered on November 8.

bull.charging.380x190

The net bulls in Investors Intelligence weekly sentiment survey rose to 34.3%, just below the 36.5% level reached on August 26 and days after the August 23 peak in the S&P.

For larger image, click on any graphic below.

CNN’as Fear and Greed index has jumped from 33 one month ago to 72 on Friday and 70 today. The CNN Index is a composite of 7 different indicators that measure momentum, sentiment, and bond market spreads.

Sentiment can be a very helpful tool in identifying when the market may be vulnerable to a pullback, after sentiment reaches a bullish extreme, or a rally when too many investors turn bearish. But it is important to remember that markets don’t go down just because too many investors have become positive. Normally, it suggests that the upside may be limited in the short run, since investors put money into the market as they become more optimistic. This means there is less buying power on the sidelines to continue to push prices higher.

In order for the market to experience a meaningful decline, investors need to be provided a reason to sell. With the end of the year right around the corner, and tax policy changing in 2017, investors will want to hold off selling winners until next year so their capital gains taxes will be less. They will also want to own the ‘right’ stocks for what I call Trumpynomics, which are the stocks that have performed the best since the election. The majority of investors thus have two reasons not sell financials, small caps, and industrials before the end of 2016. This suggests that any correction in the short term is likely to be fairly shallow.

Although seasonality is favorable going into year end, in the last five years the S&P has experienced a correction in every year. Here are the results for each year: 2015 -5.2%, 2014 -5.1%, 2013 -2.4%, 2012 -3.4%, 2011 -5.0%. Most of the corrections occurred in the first half of December. My guess is, given the dynamics that are unique to this year any correction is likely to be closer to -2.5% than -5.0%.

There are two events that could prompt a correction. OPEC meets this Wednesday and expectations are high that they will announce an agreement to cut production. If they fail to deliver, oil prices could drop sharply and unsettle financial markets. My guess is they will package some kind of deal just to save face after announcing they would have an agreement last month.

In recent months a number of producers, Russia, Saudi Arabia, Iran, and others have increased production by an amount that is nearly equal to what they promised to cut. Even if OPEC announces a cut, it won’t mean much with production levels up.

Production in the U.S. has been creeping higher as more shale production comes back on stream. In the October 31 WTR, I wrote:

“My guess is that oil could fall below $45.00 a barrel before a decent bounce takes hold. A short covering rally is coming as those short cover, just in case OPEC does agree to cut production."

Oil fell to $42.95 on November 14, before rallying to $49.20 on November 22. If a deal is announced, oil could rally to $50.00 - $52.00. If oil does rally to that price range, a potential short trade could set up. Sooner or later, I expect oil to trade below $42.95 and eventually fall under $41.00.

Next Sunday, December 4, Italy votes on a referendum that its Prime Minister has vowed to resign if it doesn’t pass. The last published poll on Friday November 18 showed the No’s had a slight lead, but more than 20% of voters were undecided. Italian law prohibits polls 15 days before an election or referendum, which sounds like a good idea for the U.S. to adopt. Voters should make up their own minds rather than being influence by a poll just before they cast their vote.

As we know, bond yields in the U.S have risen sharply, with the 10-year Treasury yield jumping from 1.86% on November 8 to 2.41% on November 22. While that increase is amazing, it pales compared to the rise in Italian 10-year bond yields, which have soared from 1.042% on August 22 to 2.068% today.

Although the referendum is not a vote about Italy’s membership in the European Union, a no vote could lead to an increase in anti-EU sentiment in Italy. The Euro has declined from 1.129 on the night of the U.S. election to 1.052 on November 22, a decline of -6.8% in two weeks. This is an enormous decline for a major currency in such a short time and sentiment has become extremely negative toward the Euro. My guess is that the Euro will rally soon, which makes me lean toward thinking the referendum will pass. If I’m wrong and it doesn’t pass, I expect a spike lower and then a good rally as short covering plays results in a sharp rally.

Although the employment report on Friday could be market moving, it would have to be far above the expectations for an increase of 171,000 new jobs in November. A number above 225,000 might raise concerns of a more aggressive Fed after they increase rates at their December 14 meeting. A weak number, below 75,000, might actually cause stocks to rally, bond yields to fall, and the dollar to weaken.

Market Average Charts Last week I thought the S&P might run into some resistance near 2210, which is where the black trend line connecting the May 2015 high and August high at 2193 comes into play. The high last week was 2213, which was posted on Friday during a half session on low volume. The RSI for the S&P pushed to 71.9, the highest level since November 2014. After a brief dip and push to another new high in early December 2014, the S&P dropped -5.1% between December 5 and December 16. My guess is that the S&P could fall to 2140 - 2160 in the first half of December, before rallying into year end.

The Russell 2000 has literally gone vertical which pushed its RSI to 81.3, the highest level in many years. A quick pullback to 1290 - 1300 is possible. If the Russell has a dip and then rallies to 1355 or so, selling a little would make sense, especially in qualified accounts.

Dollar

More than 90% of traders are bullish on the Dollar index, with expectations that the rally in the Dollar will continue into 2017. As noted last week, I think the Dollar is nearing a high in anticipation of a Fed rate increase on December 14. After a straight up move since the election, the Dollar index is giving the first signs that the run is nearing an end. The RSI, which reached 81 on November 18, has begun to roll over.

Although the Dollar may push modestly higher going into the Fed meeting or year end, the next bigger move is likely to be down. A positive reversal in the Euro would be necessary to cause the Dollar to drop since it represents 57% of the Dollar index.

Treasury 10-year Yield

Last week I thought the yield on the 10-year Treasury bond was nearing a high and that the Treasury ETF TLT was nearing a low:

“The Treasury bond ETF (TLT) is approaching what has the potential of being good support between118.00 - 120.00. There is a gap at 129.71. If TLT retraces just 38.6% of the decline from 143.62, it could fill the gap."

On Friday November 25, TLT traded down to 119.71 and has since bounced. Although the low may be in place, given the potential for tax loss selling, another drop into this support zone is certainly possible. I think the economy is going to slow in the first quarter and the Fed is likely to make sure investors know they will be in no hurry to raise rates quickly, after they increase the Fed funds rate on December 14. This could create a window for longer term Treasury rates to fall.

Gold

Last week I explained why I thought Gold and its ETF GLD and the Gold stock ETF GDX were nearing a trading low: “The RSI on Gold was 25.5 on Friday November 18, which is oversold. Gold has rallied each time the RSI has fallen below 30 as noted by the green arrows. These calculations suggest that gold is near at least a good trading low and potentially an intermediate low that could be followed by a rally above $1400.00 in 2017. The percent of gold bulls, which exceeded 90% back in June, has been less than 10% for the past week. Although tax loss selling may keep a lid on Gold, the Gold ETF (GLD), and the Gold stock ETF (GDX) before year end, it’s time to buy weakness, using a close below $112.00 as a stop on GLD and a close below $18.65 as a stop on GDX."

On November 25, GLD traded down to $112.35 before closing at $112.61. GDX traded down to $20.14 on November 23 before reversing higher. We purchased GDX on Wednesday between $20.18 and $20.45. Today GDX closed at $21.40. Maintain the stop on GDX and lower it to $111.00 on GLD.

Tactical S&P Sector Rotation Portfolio Model: Relative Strength Ranking

Although the S&P made a new high, the Major Trend Indicator is still below the high it made in mid August as the S&P reached 2193. If this divergence persists in coming weeks, the market could set up a shorting opportunity in early 2017. Given the strong upside momentum since the election and the impact of lower taxes next year, selling pressure is likely to remain muted through year end in most sectors.

In the seven days after the election, $39 billion flowed in equity ETFs. This inflow was a record and is another reflection of how broadly the bullish sentiment has become in a matter of days.

In a conference call on the morning of November 9, I suggested that the Industrials and the Russell 2000 could benefit from the excitement about infrastructure spending and the perception that a pick-up in U.S. economic growth would benefit domestic small cap stocks. After Financials, those two sectors have performed well. Since the morning of November 9 through Friday November 25, the Russell 2000 ETF IWM is up 10.12%, while the Industrial ETF XLI has gained 4.95%. Since the morning of November 9 the S&P had gained 2.6% through Friday.

welsh.tech.2016.nov.28.tactical.rotation.table

Disclosure

The S&P 500 Index is a broad-based measurement of changes in stock market conditions based on the average performance of 500 widely held common stocks. The Russell 2000 Index is a smallcap stock market index of the bottom 2,000 stocks in the Russell 3000 Index. The Nasdaq 100 is composed of the 100 largest, most actively traded U.S. companies listed on the Nasdaq stock exchange. All indices, S&P 500, Russell 2000, and Nasdaq 100, are unmanaged and investors cannot invest directly into an index.

>>>>> Scroll down to view and make comments <<<<<<

Click here for Historical Investing Post Listing










Make a Comment

Econintersect wants your comments, data and opinion on the articles posted.  As the internet is a "war zone" of trolls, hackers and spammers - Econintersect must balance its defences against ease of commenting.  We have joined with Livefyre to manage our comment streams.

To comment, using Livefyre just click the "Sign In" button at the top-left corner of the comment box below. You can create a commenting account using your favorite social network such as Twitter, Facebook, Google+, LinkedIn or Open ID - or open a Livefyre account using your email address.



You can also comment using Facebook directly using he comment block below.





Econintersect Investing


search_box

Print this page or create a PDF file of this page
Print Friendly and PDF


The growing use of ad blocking software is creating a shortfall in covering our fixed expenses. Please consider a donation to Econintersect to allow continuing output of quality and balanced financial and economic news and analysis.


Take a look at what is going on inside of Econintersect.com
Main Home
Analysis Blog
Big Mess in Italy
Are You Feeling the Economic Surge?
News Blog
This Truck's Barrier Expands Out Of The Back For A Quarter Mile
October 2016 Manufacturing New Orders Improved
3Q2016 (Final): Headline Productivity Improves
October 2016 Trade Data Mixed
October 2016 CoreLogic Home Prices Year-over-Year Growth Rate Now Improved to 6.7%.
Taiwan, Trump And A Telephone: How A Simple Act Called Out A Contradiction In U.S. Diplomacy
Infographic Of The Day: A Beginner's Guide To Encryption
Early Headlines: Asia Stocks Up, Oil Down, GOP Healthcare, Trump Not Reagan Redux, EU Ending?, UK Lost Decade, Putin Taking Over Mid-East, Yuan 'Flash' Crash And More
December 5, 2016 Weather and Climate Report - December Update - Zonal Prevails
Irish Births And Baptisms Visualised
What Happens In The Smartphone Afterlife
Water Intoxication: Are We Drowning In Advice To Drink More Fluids?
The Worldwide Virtual Reality Market Is Set To Be Huge
Investing Blog
Momentum Issues A Warning
The Great Bond Crash Of 2016: 05 December Update
Opinion Blog
The Shale-War Is Over
Fake Science
Precious Metals Blog
Silver Prices Rebounded Today: Where They Are Headed
Live Markets
06Dec2016 Market Close: Wall Street Closed Higher, Commodities Remain Weak, The Bull Marches On
Amazon Books & More






.... and keep up with economic news using our dynamic economic newspapers with the largest international coverage on the internet
Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government



Crowdfunding ....






























 navigate econintersect.com

Blogs

Analysis Blog
News Blog
Investing Blog
Opinion Blog
Precious Metals Blog
Markets Blog
Video of the Day
Weather

Newspapers

Asia / Pacific
Europe
Middle East / Africa
Americas
USA Government
     

RSS Feeds / Social Media

Combined Econintersect Feed
Google+
Facebook
Twitter
Digg

Free Newsletter

Marketplace - Books & More

Economic Forecast

Content Contribution

Contact

About

  Top Economics Site

Investing.com Contributor TalkMarkets Contributor Finance Blogs Free PageRank Checker Active Search Results Google+

This Web Page by Steven Hansen ---- Copyright 2010 - 2016 Econintersect LLC - all rights reserved