At Least Investor Sentiment Supports More Rally!
Thursday, December 22, 2011. 9.00 a.m. My two favorite measurements of investor sentiment are the poll of its members by the American Association Individual Investors, and the VIX Index, also known as the Fear Index. As most investors know, investor sentiment is a ‘contrary’ indicator. That is, once investor sentiment reaches an extreme of either [...]

Thursday, December 22, 2011. 9.00 a.m.

My two favorite measurements of investor sentiment are the poll of its members by the American Association Individual Investors, and the VIX Index, also known as the Fear Index.

As most investors know, investor sentiment is a ‘contrary’ indicator. That is, once investor sentiment reaches an extreme of either bullishness or bearishness the market usually moves contrary to what that majority expects.

That only makes sense. When the market is in a significant decline investors become more worried and bearish, so that by the time a correction reaches a bottom, investor sentiment has reached an extreme of bearishness and fear.

In the other direction, as a rally continues and investors are seeing their portfolios increasingly rise in value, the natural tendency is to become increasingly optimistic and bullish. So that by the time a rally reaches a top investors have become very bullish and confident.

The pattern can be seen in this chart of the VIX, which measures the sentiment of options players.

Fear is usually low (bullishness high) at rally tops as marked by the vertical red lines.

The VIX (fear or bearishness) then rises as the subsequent correction gets underway and continues. Fear or bearishness is then high (above the horizontal blue line at about 32 on the VIX) by the time the correction bottoms.

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Most recently, the VIX Index reached a level of very low fear (high bullishness) last spring and summer while the previous year’s rally was underway. But then when the market topped out at the end of April, fear or bearishness began to grow after the summer correction had been underway for a couple of months, and bearishness was at a high level in October when the correction bottomed.

Fear has now been declining with the new rally that began at the October 3rd bottom.

And it has further to fall if it is again cycling toward the low level of fear (high level of bullishness) usually seen at rally and market tops, supporting the thought that the rally has further to go.

Meanwhile, the latest reading of the weekly AAII poll was released last night, and showed the bullish percentage was up 6.5 to 33.7%, and the bearish percentage was down 5.4 to 28.2%.

That’s a long way from the 55% bullish, 20% bearish levels that we consider to be the danger zone when a top could be near.

So it looks like sentiment at least supports further rally.

But the U.S. market is still stalled at 200-day m.a.

The rally carried the major indexes up to the potential resistance at their long-term 200-day moving averages several weeks ago, where they have been stalled.

122211c

 

122211b

State governments have revenues back at pre-recession levels!

Now there’s a surprising piece of positive news.

The Rockefeller Institute of Government reported that total tax revenues of 48 states returned to pre-recession levels in the 3rd quarter, saying “After seven quarters of growth, overall state tax revenues have recovered to pre-recession levels, although not yet back to previous peak levels.”

The study included 48 states, and did not include Hawaii and New Mexico, for which data was not available.

Is that another positive for the jobs picture going forward? The new jobs being created in the private sector have had to outweigh government lay-offs at the Federal, State, and Municipal levels in order to produce the impressive improvements in overall jobs creation of the last several months.

With state tax revenues recovered to pre-recession levels will that mean fewer lay-offs at the State level, and perhaps even rehiring?

Talk Tough But Open the Vaults!

We stole that from a similar line in an article in the New York  Times this morning.

That was the approach of the U.S. government under both President Bush Jr. and President Obama to pull the U.S. out of the 2008 financial meltdown. Talk tough but open the vaults.

For months the European Central Bank has been talking tough, insisting that individual eurozone governments had to impose tough austerity measures and bring their debt and deficits under control on their own, that the ECB wasn’t going to bail them out with massive purchases of their bonds.

But on December 8 the bank announced its intentions to offer unlimited, low-cost, three-year loans to European banks. Just what central banks do, loan to banks not governments.

It opened the vault for the first time yesterday and 523 banks showed up to borrow 489.2 euros ($640 billion), well above expectations.

The intention, or hope, is that banks will use the money to buy the high-yielding bonds of Greece, Italy, Spain, etc., helping the banks with the profit on the spread, while helping to alleviate the debt crisis.

Markets reacted negatively yesterday, spooked by the number of banks showing up for the loans, and the total amount they borrowed, concerned it indicates the crisis is worse even than previously thought.

But $640 billion is also a big chunk of money thrown at the problem, and perhaps more important, an indication that while the ECB is talking tough it does have the eurozone’s back.

To read my weekend newspaper column ‘The Truth About Election Years!’ Click here.

Subscribers to Street Smart Report: The new issue of the newsletter is in the subscriber area of the Street Smart Report website from yesterday, and a hotline from last night.

Yesterday in the U.S. Market.

The market was down in the early going but recovered in the afternoon. The Dow was down about 100 points in the morning, but recovered to close basically flat, up 4 points. The rest of the market was mostly positive except for the Nasdaq. And market breadth was more positive than a Dow up only 4 points. There were 1,832 stocks up and 1,191 down on the NYSE. 

The Dow closed up 4 points, not measurable as a percentage. The S&P 500 closed up 0.2%. down 1.2%. The NYSE Composite closed down 1.3%. The Nasdaq closed down 1.3%. The Nasdaq 100 closed down 1.0%. The Russell 2000 closed down 1.9%. The DJ Transportation Avg. closed down 2.3%. The DJ Utilities Avg closed down 0.9%.

Gold closed up $1 at $1,618 an ounce, hanging on after rallying back above $1,600.

Oil closed up $1.66 at $98.90 a barrel.

The U.S. dollar etf UUP closed unchanged.

The U.S. Treasury bond etf TLT closed down quite sharply again, down 1.4%.

Yesterday in European Markets.

Markets in Europe closed down yesterday. The London FTSE closed down 0.6%. The German DAX closed down 0.9%. France closed down 0.8%.

Asian Markets Closed Mixed Again Last Night.

The DJ Asia-Pacific Index closed down 0.3%.

Among individual markets last night:

Australia closed down 1.1%. China closed down 0.3%. Hong Kong closed down 0.2%. India closed up 0.8%. Indonesia closed up 0.1%. Japan closed down 0.8%. Malaysia closed up 0.4%. New Zealand closed down 0.5%. South Korea closed down 0.1%. Singapore closed down 0.3%. Taiwan closed unchanged. Thailand closed down 0.1%.

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Markets This Morning.

European markets are up this morning. The London FTSE is up 1.0%. Germany’s DAX is up 0.8%. France’s CAC is up 1.2%.

Oil is up $0.09 a barrel at $98.76.

Gold is down $5 an ounce at $1,608 an ounce, but still back above $1,600.

This morning in the U.S. Market:

This week will be a quite heavy week for potential market-moving economic reports, especially from Wednesday on, including new housing starts, existing home sales, another revision to 3rd quarter GDP, and Durable Goods Orders. To see the full list click here, and look at the left side of the page it takes you to.

Monday’s report was that the NAHB Housing Market Index, which measures the confidence of the nation’s home-builders, rose from 19 in November to 21 in December, the third straight monthly increase, and now at a 17-month high.

Tuesday it was that New Housing Starts surged up 9.3% in November, much stronger than the consensus forecast of economists.

Yesterday it was that existing home sales rose 4% in November and the inventory of unsold homes fell by 5.8% to a seven-month supply.

This morning’s reports were that new unemployment claims fell again last week, this time by 4,000 to 364,000. But 3rd quarter GDP was revised down some, to 1.8% growth from the previously reported 2.0% .

Still to come are Consumer Sentiment at 9:55 am, and Leading Economic Indicators at 10 a.m.

I’m putting this post on a half-hour early due to a meeting this morning, but at the moment anyway:

Our Pre-Open Indicators:

Our pre-open indicators are pointing to the Dow being up 25 points or so in the early going, meaningless as to direction by the close.

To read my weekend newspaper column ‘The Truth About Election Years!’ Click here.

Subscribers to Street Smart Report: The new issue of the newsletter is in the subscriber area of the Street Smart Report website from yesterday and a hotline from last night.

How are you doing? We can help, and at very reasonable cost! Street Smart Report Online provides an 8-page newsletter every 3 weeks, an in-depth 6 page interim update every Wednesday on our intermediate-term signals and recommended holdings, an in-depth 4-page ‘Gold, Bonds, Dollar’ update every 2 weeks, and special reports and hotline updates as needed. Sectors, stocks, bonds, gold, short-sales, long-side and inverse etf’s and mutual funds. Highly regarded and in its 23nd year. As a bonus for a one-year subscription you will also receive my latest book Beat the Market the Easy Way- Proven Seasonal Strategies That Double the Market’s Performance. Click here for subscription information.

I’ll be back Saturday morning with the regular Saturday morning post, as usual later than the week-day posts, probably around 11 a.m. (This blog appears every Tuesday, Thursday, and Saturday morning!).

**** End of Today’s post*****

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