Thursday, August 23, 2012

Stock Market Indicators

Let's review some of the indicators that can be useful in assessing the near-term outlook for the stock market:

(1) Rydex Asset Ratio is bearish. Yesterday, Don Hays, a savvy market pro and good friend, noted: “On the Psychology side, one of our very best indicators from the regression testing is the Rydex Asset Ratio, and its signal today says these often-wrong-at-extremes traders are now at their most bullish stance of the last few years. You have to go back to 1998 and 2000 to find them with more bullish sentiment.”

(2) Our Fundamental Stock Market Indicator (FSMI) is bearish. It has been highly correlated with the S&P 500 since 2000, but it hasn’t confirmed the rally that started on June 1. The FSMI was back near lows for the year during the week of August 11. The good news is that initial unemployment claims, one of the FSMI’s three components, fell to 363,750 during that week on a four-week average basis. That’s the second-lowest reading this year. Jobless claims are inversely correlated with the S&P 500.

(3) Investors Intelligence Bull/Bear Ratio is relatively neutral. This sentiment indicator rose to 1.9 this week, just about at the midpoint between the often bullish and bearish extremes of 1.0 and 3.0, respectively. Market sentiment, as measured by Investors Intelligence Bull/Bear Ratio, is relatively neutral. The percentage of bulls, however, is relatively high at 47.3% (the most since April) with only 24.7% bearish. The recent jump in the bullish percentage is attributable to a big decline in the percentage in the correction camp.

(4) The S&P 500 Put/Call Ratio is very bullish. The four-week average of this ratio plunged from a recent high of 2.02 during the week of June 1 to 1.37 during the week of August 17. That’s up a notch from 1.36 the prior week, the lowest reading since April 3, 2009, which was a very good time to be bullish.

(5) VIX and volume are confusing. All these mixed indicators may not be as useful as in the past given that the volume of the NYSE continues to plunge and that the VIX of both the S&P 500 and the NASDAQ 100 are the lowest since 2005 and 2006. There seems to be lots of complacency among fewer and fewer players in the market.

On balance, I think that stock prices may move sideways between now and the November elections. It’s certainly hard to characterize the rally since June 1 as a “Romney Rally” given that the presidential race remains in a dead heat. A few pundits have suggested that it’s actually been an “Obama Rally,” figuring that the market favors the devil we all know rather than the one we don’t.

By the way, there is already some chatter that at the Democratic Convention during the week of September 3, the President will announce that Hillary Clinton will be running as his vice president. Let’s see how the market reacts to that announcement. I’m still targeting the S&P 500 at 1450 by the end of the year and 1550-1650 by mid-2013, but the situation is fluid.

Today's Morning Briefing: Evel Knievel & the Fed. (1) Is Ben Bernanke a daredevil? (2) The greatest stunt. (3) Leap of faith. (4) The Fed is set to do something. (5) QE3 or more NZIRP? (6) The CBO says a recession is coming. (7) A bunch of mixed-up stock market indicators. (8) The devil we know and his next vice president. (9) Aging bull. (10) Flash! Europe is in a recession, and China is slowing. (11) Revenues slowdown is widespread. (12) More profit margins are down than up. (More for subscribers.)



No comments: