The Big Picture | Contrary Indicators

The Recession Buy Indicator

Sunday, May 18, 2008 | 09:00 AM

Interesting piece by Mark Hulbert in the Sunday NYT on the Recession Buy Indicator. This timing signal was created by Norman Fosback author in the mid-1970s of the popular investment textbook “Stock Market Logic.” The book, though out of print, was first published in 1976, and has gone through 18 printings, selling more than a half-million copies (used copies are available at Amazon and elsewhere).

The indicator goes something like this:

"The [ Recession Buy Indicator] focuses on the four business barometers that together make up the federal government’s index of coincident economic indicators. These four focus on industrial production, manufacturing & trade sales, nonfarm payrolls and personal income. The Recession Buy Indicator is triggered when — as is the case today — each of these four gauges is below its level of six months earlier. On such occasions, Mr. Fosback considers the economy to be in a recession or very close to it."

I love this sort of approach, for several reasons: It is a contrarian play, which has tremendous appeal to me; it provides an objective, mathematical way to make a buy or sell decision; it has a significant body of backtesting.

Since creating the indicator in 1979, it has triggered 4 buy signals. Over the 12 months following, NYSE average gains were 37%, and after 3 years, 106% (triple the stock market’s average).

Before you mortgage the house to buy long dated index calls, however, there are a few caveats worth noting. The previous signal was in February 2001 -- 18 months before 2000-2 bear market lows. Buyers of that signal got crushed in the ensuing selloff.

That sort of miss is the reason Ned Davis Research is less of a fan. While the average performance of the indicator was very good, the misses are enough to caution not blindly following the signal. And, during some recessions, the stock market’s actual bottom came much later.

"That is one reason, he said, that his firm doesn’t mechanically issue a buy signal six months after the economy begins to turn downward. Instead, it prefers to await confirmation from a number of its other indicators that a bottom has been formed. In the current market, that confirmation has not yet come, he said, and his firm has a policy of not trying to predict when it will."

Hulbert's use of data and statistics is why he is always an interesting read . . . Good stuff.

UPDATE: May 18, 2008 10:23am

Alternate views can be seen here and here .

Sources:
An Alarm Is Blaring: Time to Buy
Mark Hulbert
NYT, May 18, 2008
http://www.nytimes.com/2008/05/18/business/yourmoney/18stra.html

Stock Market Logic a Sophisticated Approach to Profits on Wall Street
Norman Fosback
Hardcover: 384 pages
Publisher: Inst for Econometric Research (1976)

Signs of a Housing Bottom?

Friday, May 09, 2008 | 09:00 AM

in Contrary Indicators | Real Estate

This is the very first evidence I have seen that we might be near the bottom in housing.

No, not the chart above -- this:
>

It’s Going to Get Worse
http://www.newsweek.com/id/135724

Economist David Lereah was once the housing market's biggest cheerleader. Now he says the bust isn't near over, and home prices still have a long way to fall.

"We're not at the bottom," he says. "[People] want it to be near the bottom, but we're not there yet. The leading indicators are still very bad. Pending home sales are still in bad shape. Mortgage applications are low … There's still supply out there in abundance … This thing is going to get worse before it gets better."

Lereah says that the industry may begin to see a slight uptick in sales later this summer, which could signal the start of the recovery. Home prices, however, will continue to fall. According to the latest numbers from the Case-Shiller index, the average U.S. home has lost around 15 percent of its value since the market's peak. "We're probably going to end up with a 20 percent [decline], but if I'm wrong it will be even more than that," he says.

I'd call that capitulation -- tho its only one person.

Oh wait -- there's this: "So even if this slump remains far from over, David Lereah still thinks it may be a smart time to buy." That suggest no bottom in sight.

Oh Yeah, that's the good stuff . . .

Source:
It’s Going to Get Worse
Daniel McGinn
Newsweek, May 6, 2008 | Updated: 11:15 a.m. ET May 6, 2008
http://www.newsweek.com/id/135724

Gloom in the Housing Market Persists
Asha Bangalore
Northern Trust Global Economic Research, May 7, 2008
http://tinyurl.com/5fqoq8

Related:

U.S. Home Slump Puts Owners Under Water, Zillow Says http://www.bloomberg.com/apps/news?pid=newsarchive&sid=akLd6UL0v004

What's Next for Crude Oil ?

Friday, May 09, 2008 | 06:39 AM

in Commodities | Contrary Indicators | Energy | Psychology/Sentiment | Technical Analysis

>
"The commodity looks like it has legs, which is trader talk for its going higher. While I do not make a habit of forecasting commodity prices, $110, and then $125 are our next two targets.

I got your core inflation right here . . ."

>

That was our March 3rd quote on energy prices.

As Bloomberg reported this morning, Crude was $125; As I write this, CNBC is flashing that Crude is over $126 a barrel.

We have been Bullish on Oil and energy stocks for a long time. Our first recommendation of Crude Oil was back in 2003, when the price broke out over $32 per barrel. I picked Energy as my favorite sector for the Business Week forecasts for 2004 -- something that more than a few people ridiculed at the time.

In 2004, we observed our target of Oil = $50 a Barrel was hit. I also explained why at $40-50 there was no “terror” premium (comments picked up by WSJ, Barrons, and Slate).

Early on, we recognized that it was Chinese Oil Demand underlying the increase in cost. We also looked at why Refining Capacity was a problem. We have examined Global Crude Oil Demand & Gasoline, we looked at Oil: Inflation adjusted.

We looked at whether Oil Jitters Gotten Overblown?. That answer was no. We also looked at the question: Do Higher Oil Prices Lead to Recessions? Turns out the answer is yes. Large Hedge Funds who had been ignoring our bullish energy advice did so at their own peril.

So where does that leave us in 2008?

Well, we have political considerations with the US presidential elections, upcoming Summer Olympics in China, an ongoing war or 3 in the Middle East, and of course, a weak dollar (which is now in a counter-trend rally).

Let me offer one last way to think about Energy: Its relative strength versus precious metals.

As the dollar has strengthened, precious metals have gone south. Yet Crude oil has continued upwards, implying that this is more than a mere currency story.

Dennis Gartman writes:

"All things being equal, if one were to hear that crude would be $2/barrel higher and then were asked how much stronger gold would be, one would answer, swiftly and with confidence, "Oh, at least $5-$10/ounce." Wrong!! Gold's down $6/oz, sending the gold/crude ratio to new lows for the past several years. At the current levels, it now takes 7.06 barrels of crude to "buy" one ounce of gold. 15;1 is rather more "normal."

Have a look at this ratio in a 3 year chart:

graph via Stockcharts

I'll see if I can find produce a longer term chart of the ratio above -- it might be revealing.

~~~

Its funny, but I got a lot of grief over an $86 forecast several years ago -- but $125 was pretty easily accepted. That implies a major change in psychology is taking place.

More on this in the coming weeks . . .

Sources:
The Gartman Letter
Dennis Gartman,
Thursday, May 8, 2008
http://thegartmanletter.com/

Crude Oil Rises to Record Near $125 a Barrel on Supply Concern
Grant Smith and Christian Schmollinger
Bloomberg, May 9, 2008
http://www.bloomberg.com/apps/news?pid=20601087&sid=auqhuZnpEFFE&

Are Markets Leading or Lagging Indicators ?

Saturday, April 19, 2008 | 08:35 AM

Everyone "knows" that markets are leading -- not lagging -- indicators.

But are they really? It always gets stated so unequivocally that price contains information -- and I do not disagree with that belief.

However, I am not so sure it contains all the specific information that is often claimed. Indeed, we see short term market action used to bolster arguments in a terribly one-sided fashion all the time. When it goes this way, it is significant and meaningful; When it goes that way, well, not so much. It is a thesis applied inconsistently at best.

So are markets truly leading indicators?

I have a nuanced theory, and it goes something like this: There are so many varied inputs into equity markets -- sentiment, trend, liquidity, momentum, valuation -- anyone of which can be dominant at any given moment. Merely assuming markets are giving you a 6 month heads up into the future, based on recent action, is often unwarranted. There are simply too many examples where market prices are shown to be, oh, let's be generous and call it subject to misinterpretation.

Equity markets can and do provide some insight -- but they require careful interpretation, avoidance of broad generalities and oversimplifications. Unfortunately, that is often the stock in trade of many financial television shows and their T-head guests.

Let's take a look at some recent market action, and see what it might or might not be forecasting:

As the table above shows, this week saw US indices up between 4-5%. Many Bulls have seized on this as proof that the recession is now over, or will be soon enough. All clear! Its safe to get back in the water.

On the other side of the world, China's stock market has been cut in half over the past six months. Are their markets forecasting, as some Bears proclaim, that a worldwide economic slowdown is occurring?

Aren't these two beliefs rather inconsistent?

One of my favorite historical examples are the stocks of the Homebuilders. On their long, 75% decline, each and every rally attempt was seized on by housing bulls (usually parroting something Cramer said), proclaimed the bounce as proof positive that the Housing bottom was now in.

That turned out to be a very expensive misinterpretation of markets as a leading indicator.

Let's go back to the turn of the century: In late 2000, markets rallied right into the start of the recession; they sold off right into its end in October 2002 -- just as the recovery was beginning.

Here's one last chart, via Portfolio's Zubin Jelveh. Note that Consumer spending, GDP and Employment all peaked long before the October 2007 market highs.
>

Business Cycle Leads Equities

courtesy of Portfolio

So, are markets leading or lagging Indicators ?

My answer is that they can be both. But getting the correct interpretation involves careful review of the charts, sentiment reads, liquidity, momentum, market internals, and other data.

Insightful interpretation often yields clues, but is fraught with the possibility of error.

Previously:
The John McCain Market Selloff
http://bigpicture.typepad.com/comments/2008/03/the-john-mccain.html

Sources:
China Stocks, Once Frothy, Fall by Half In Six Months
JAMES T. AREDDY in Shanghai, CRAIG KARMIN in New York
WSJ, April 19, 2008
http://online.wsj.com/article/SB120856528917628111.html

Chart of the Day: The Business Cycle in Action
Zubin Jelveh
Portfolio, Mar 7 2008 12:59pm
http://www.portfolio.com/views/blogs/odd-numbers/2008/03/07/chart-of-the-day-the-business-cycle-in-action

Related:
Bloomberg TV has a special "China Focus Week” starting Monday, April 20th

Economist Cover: The Great American Slowdown

Wednesday, April 16, 2008 | 10:30 AM

in Contrary Indicators | Economy | Financial Press

One of the things that people get wrong all the time is the contra meanings of magazine covers. This is a subject we have discussed for quite some time around here.

The assumption is that if something shows up on a mag cover, whatever the subject is must therefore be all over, hence, its time to go the other way. This is a fundamental misunderstanding of what the cover indicator is all about.

The short version is that when a long running trend, well represented by consensus opinion and stock prices, finally bubbles up to the front of a major magazine cover, THATS WHEN its very very late in the cycle. Hence, it is a contrary indicator.

A recent classic cover was the Time Magazine on Housing back in the summer of 2005. The timing was near perfect, as Housing peaked in August '05. However, when something is relatively new, such as the US economic slowdown (see Economist cover below), it is not a true contrary indicator.

Let's compare these two examples:

• Housing Boom
- Lasted almost 10 years
- Home prices increased 2 and 3 standard deviations from historical means
- Homebuilder stocks ran 500% to all time highs

• US Economic Slowdown
- (Un)Offically going on for less than 6 months; GDP still positive
- S&P 500 and Dow Industrials made all time highs six months ago
- Equities still within 10-15% of highs
- No consensus for a recession

When we compare these two quantitatively, the differences are pretty obvious as to which one is the true contrary indicator . . .

Previously:
The Magazine Cover Indicator
Big Picture Overview

uh-oh: Time Magazine on Housing http://bigpicture.typepad.com/comments/2005/06/uhoh_time_magaz.html

Source:
The great American slowdown
Apr 10th 2008
The Economist print edition
http://www.economist.com/opinion/displaystory.cfm?story_id=11016333

Contrary Indicator: Page Views Skyrocket!

Tuesday, March 18, 2008 | 08:00 AM

in Contrary Indicators | Markets | Trading | Weblogs

We noted back in February that the surge in page views tends to occur towards a tradable low -- not THE low, but usually one that is good for a few weeks. That last contrary signal worked out quite well.

We got another such signal on Monday -- page views skyrocketed to what might actually have been the single biggest one day total.

In other Contrary Indicator news, it was reported yesterday that Goldman Sachs replaced the perennially optimistic Abbie Joseph Cohen as their chief markets forecaster.

Have a look at the chart below. This suggests a temporary crescendo of bearish activity:
>

Above you will find the latest snap of the traffic. Inexplicably, Typepad uses GMT to GMT as their day, rather than having the date be set to the users locale (i.e., midnight to midnight EST).

I'm writing this Monday night, and hopefully won't be too embarrassed about this Tuesday morning (Ed: Futures are considerably higher this morning). Be aware that Producer Price Index (PPI) and Housing Starts are out at 8:30am, and the FOMC announcement is at 2:15pm, so today is likely to be quite volatile.

~~~

I am curious if any other bloggers saw a similar traffic surge . . .

Barrons Review: Is the Magic back at Disney?

Monday, February 25, 2008 | 01:30 PM

We've held onto The Walt Disney Co. (DIS) for quite some time.

I've mentioned it in a positive vein repeatedly -- over a year ago on PBS with Paul Kangas, and then again here (Tribune Media), and even a year before that on the Pixar takeover.

Why? A few years back, our quant tool (an earlier version of the FusionIQ software) had Disney highly ranked (12/05/2006). Since then, the shares have performed rather well, especially as the US dollar weakened.

But back in 2005/06, analyst coverage was rather neutral. Well, it turns out that the fundie guys missed the boat, while the unbiased quant assessment turned out to be much better at stock picking.

Since last year, however, there has been a deterioration of the many factors that go into the quantitative ranking of Disney: The short and intermediate term trend was broken, money flow slowed down, and institutional ownership slipped. The quant ranking of DIS started to drop to bearish levels (below 70), prompting us to exit the positions in our managed accounts.

Fast forward to this weekend's edition of Barron's: They had a glowing cover story titled "The Magic is Back" about Walt Disney and its prospects for the future. Problem is, its a few years late to the party.

Rather than merely assume Barron's cover story is a contrary indicator, we decided to run Disney through the system to generate a new unbiased metric. As seen in the chart below, Disney's master quant ranking is now down to only a 58 out of a possible 100.

Maybe there is some magic left in the kingdom, but objectively speaking, its not showing up in our system. With only a 58 ranking, I cannot tell if the magic has come and gone, or if its already reflected in the share price.

If you want to invest in Disney shares, then perhaps your money would be better served waiting for the quantitative ranking to improve. We consider it bullish when its ranking score moves back over 70 again. (I will set up an email alert based on ranking change and post it here if and when that occurs).

>
Disney (DIS) daily
click for larger chart

Chart courtesy of FusionIQ

Economists: 49% Chance of Recession

Thursday, February 07, 2008 | 06:54 AM

in Contrary Indicators | Economy | Psychology/Sentiment

One of the themes we seem to be hitting a lot at TBP is compromised actors in the market/economic system. We had the Analysts in the iBanking scandal after the dot com bubble unwound, then ratings agencies in the sub-prime debacle.

The latest group to be looked at askance: Economists.

Suggestions of inherent structural bias was put forth by several BP readers who work at bulge bracket firms. They have made the following (somewhat persuasive) argument: iBanks, Brokers and Money Center Banks live on some revenue combination of asset based and transactional fees. They make more revenue in bull markets than bear markets. Further, most of their clients are similarly compensated. Hence, their research and commentary tends to look on the (Monty Pyrthonish) bright side of life.

Perhaps. My view is the discipline is not particularly good at what it is supposed to do, it is too narrow, manages somehow to ignore human nature, has become way over-politicized, and last, conceptualizes the world in an absurd way.

But inherently biased works too. And that leads us directly to today's discussion: According to a recent WSJ survey, Wall Street economists almost put the odds of a recession at almost 50/50. Better than even chance of no recession:

"On average, the survey's 52 respondents put the odds of a recession at 49%, up from 40% in the January survey and 23% in June. Moreover, if a recession does materialize, they gave 39% odds that it will be worse than the past two recessions . . .

On average, the economists, who were surveyed between Jan. 31 and Feb. 4, predicted the nation's gross domestic product -- or total output of goods and services -- will expand at a 0.6% annual rate in the first three months of this year; that is down from the 1.2% pace predicted in the previous survey. In fact, they lowered their growth estimates for every quarter of 2008. The economy grew a slim 0.6% in the fourth quarter of 2007, a sharp deceleration from the third quarter's 4.9%.

If there is a downturn, the economists said, there is a better than 1-in-3 chance it will be worse than the one in 2001 or the one that ended in early 1991."

The most fascinating tidbit about Wall Street economists: As a group, they have never forecast a recession in advance. Never. Some get it right, but overall, the group has been consistently late in recognizing contractions.

Not so Dismal Science after all . . .

Click for interactive WSJ (free)

Source:
Economists Raise the Odds of a Recession to 49%
Bernanke's Ratings Slip, Despite Effort To Reignite Growth
PHIL IZZO
WSJ, February 6, 2008; Page A4
http://online.wsj.com/article/SB120224203841244993.html

All Me, All the Time: Briefing.com

Monday, February 04, 2008 | 02:43 PM

in Contrary Indicators | Financial Press | Media

I have a few longer posts and analyses in the queue, but for today, its gonna be way too much me.

The latest is via Briefing.com:

Blog On

The blogosphere has become a more & more useful tool for many, & as Barry Ritholtz pointed out this morning, he has a new indicator...
"What is it? You. As a group, it seems that traffic to blogsites can be tracked as a contrary indicators -- especially when the market is under pressure. Note that the selloff in August, and then the more recent whackage in January, each created a major traffic spike -- which led to a bottom, and a healthy bounce... Now, maybe the content here suddenly got much better. It could be that I suddenly became a whole lot more insightful, or perhaps my prose more poetic -- but I doubt it. ..What most likely occurred was the market turmoil generated an influx of new visitors."
Bond Squad doesn't name check CNBC too often, but something's need to be noted: Perma-bull, perma-guest Dennis Kneale told a group that bloggers are too negative, essentially saying nobody make money by being negative.

OK. Tell that to the money managers, who have been, especially put holders who got their direction as well as a solid run-up in volatility levels.

Back in July, Barry noted "Last night on Kudlow, I was [excoriated] by Forbes editor Dennis Kneale for being too Bearish on the U.S. economy," that was about 10% ago on the DJIA (intra day) near 17% a week & change ago (S&P off 11.5% & 19.5% in same time frames).

-Beth Malloy

Man, a 10% bounce -- off of a 20% selloff -- and suddenly, the natives are getting cocky again.

Dennis, don't make me roll out the DK Top indicator again (I'll do ti! I will !)

Blog Traffic as a Contrary Market Indicator

Monday, February 04, 2008 | 08:30 AM

in Contrary Indicators | Markets | Psychology/Sentiment | Technical Analysis | Weblogs

Hey folks, I have to let you know about a new trading tool I have.

That bullish reversal call on CNBC on January 23rd? In addition to the other indicators I track, I have another "special" sentiment reading. Its become my secret weapon.

What is it?

You.

As a group, it seems that traffic to blogsites can be tracked as a contrary indicators -- especially when the market is under pressure.

Note that the selloff in August, and then the more recent whackage in January, each created a major traffic spike -- which led to a bottom, and a healthy bounce.

Sitemeter traffic to TBP as of January 30, 2008

Now, maybe the content here suddenly got much better. It could be that I suddenly became a whole lot more insightful, or perhaps my prose more poetic -- but I doubt it.

What most likely occurred was the market turmoil generated an influx of new visitors.

NYSE % of stocks > than 200 Week Moving Average

Wednesday, January 23, 2008 | 04:30 PM

in Contrary Indicators | Markets | Psychology/Sentiment | Trading

Earlier today, this went out to our research clients:

Last week, we noted the % of NYSE stocks trading below their 200 day moving average was about 23%. That suggested we were close, but not at a tradeable low.

Today, our trusty Bloomberg terminal is showing just 13% of NYSE stocks trading above their 200-day moving averages.

That is lower than anytime in the 2000-02 bear market. And lower than anytime in the 1998 and 1994 bear markets.

This indicator is saying that sentiment has become excessively negative -- considering we are only 3 months off of the all time S&P500 highs.

This suggests we should begin the counter-trend rally shortly. We would expect this to last anyway from 2 weeks to 2 months, run 5-15%.

We also would use this upcoming lift as an opportunity to sell equities.

This is a bounce, not a major shift in trend . . .

Traffic Spike, part II: Google Trend

Saturday, January 19, 2008 | 05:30 PM

in Contrary Indicators | Markets | Psychology/Sentiment

One of the comments in the prior post pointed to this Google chart:

>
Trend history: stock market crash

I'm not sure how reliable an indicator this is, since we are nowhere near the February China spike, but the market loss is greater. Do people get inured, or is this somehow not as bad?

~~~

Hey, can anyone get me the Google Trend data for the 1929 and 1987 crashes . . . ?

UPDATE January 19, 2008 7:03pm

I'm heading out for the evening, but here's a few more:

Trend History: Recession

Trend History: Subprime

Have fun with this!

Traffic Spike?

Saturday, January 19, 2008 | 08:34 AM

in Contrary Indicators | Markets | Psychology/Sentiment | Weblogs

Is there any contrary indicator component to (bearish) blog traffic? I wonder . . .

Note the trend over the past 30 days:
>

Sitemeter traffic to the Bigpicture as of 1/19/08 7:42am

I assume the huge increase in traffic this month is (partially) a function of the market turmoil. But geez, that's a pretty big bump.

~~~

For the record, I do not consider myself a "bear" -- Its just that I try to find the truth, search out the facts of the matter. As Rob Corddry once asked, "How does one report the facts in an unbiased way when the facts themselves are biased?"

For the past few years, the macro-economic circumstances have been moving towards the exact issues now causing problems . . .

Fox Business Channel Market Top ?

Friday, January 18, 2008 | 06:30 AM

in Contrary Indicators | Financial Press

Last year, Dan Gross looked at what he called the rather inauspicious timing of the Fox Business Channel (FBC) launch.

Since we here at the Big Picture love contrary indicators -- the weirder, the better -- we paid a special notice to that column. It was diaried away to be followed up at a later date.

Well, its now a full quarter later, and guess what? The Fox Business Channel debuted on October 15, 2007. With its first quarter officially behind it, how has the market performed?

On the last trading day before FBC debuted, the Dow closed at 14,093. Yesterday's Dow close was 12,159.21 -- 60 points shy of a 2,000 point whackage. (I don't want to think what that is annualized!)

The psychology of this is pretty straight forward. In the depths of market lows, the despair is so thick that many people lose the ability to make rational risk/reward analyses. Consider what we wrote back in 2003 as signs of a market bottom:

Financial Media Closings: Financial television viewership and finance magazine subscriptions are a direct reflection of the general population’s interest in equities. At market tops, TV ratings soar, and Publishers sell lots and lots of magazines. Bottoms occur when the public is disgusted with stocks: They certainly don’t want to hear about them on TV or read about them during their leisure hours.

By May 15th, 2003, several high profile financial magazines had closed: Mutual Funds Magazine, Bloomberg Personal Finance, Worth magazine; Also shutting down was Web FN, a streaming financial news webcaster. As magazines were closing, financial television ratings were fading. Once upon a time, you could walk into any bar or restaurant to find CNBC playing on the television over the bar. Stocks had become the newest sports franchise, with fans rooting for their “teams.”

Since those halcyon days, CNBC’s viewership has slid dramatically; The N.Y. Post reported that financial channel CNNfn (a CNBC competitor) was on the verge of closing down. The station (CNNfn) ended up revamping their format, away from pure stock coverage, and towards the more broadly defined “personal finance.”

During a Bull run, the opposite occurs: People become emboldened to take chances, swing for the fences. They lose all risk aversion. Launch a 3rd (or 4th) business news channel? Why not! Its a bull market!

Examples abound. As Dan correctly observed, TV shows like The $treet and Bull debuted in 2000, and real estate show Hot Properties in the fall of 2005.

What this tells us is at extremes of good and bad, leaning against your instinct is the desired thing to do . . .

Source:
Did Roger Ailes Call the Market Top?
The strange timing of the Fox Business Channel launch.
By Daniel Gross
Posted Monday, Oct. 22, 2007, at 3:19 PM ET
http://www.slate.com/id/2176408/

Contrary Indicators: 2000 – 2003 Bear Market
Barry L. Ritholtz,
Maxim Group, August 2003
http://bigpicture.typepad.com/comments/2003/09/contrary_indica.html

Download PDF file

Market Sentiment

Wednesday, January 02, 2008 | 03:00 PM

in Contrary Indicators | Markets | Psychology/Sentiment

As the indices accelerate to the downside -- the Dow Industrials are off 240 points as I type this -- its as good a time as any to look at the current market sentiment.

These provide a snapshot into when traders and investors get too greedy or fearful. Typically, you can use these measures as a useful short term metric for timing entries and exits.

And, these data points are much more reliable than the typical anecdotal sentiment discussions: "markets should selloff (rally), 'cause everyone I know is bullish (bearish)."

CBOE Equity & Index Put/Call Ratio

>

AAII Investor Bullish Sentiment Survey

>

AAII Asset Allocation Survey

What do these charts suggest?

This sentiment data implies that bearishness is getting very negative. Its not at the point where a rally is absolutely imminent, but we are slowly moving in that direction.

~~~

Here's our full report today: (click to open the full PDF)
Fusions_Analytics_Equity_Market_Review_Jan_2nd_2007.pdf

~~~

For those of you who haven't signed up yet, here's the code for the free trial:

Go to the Fusion IQ home page , then select Subscribe. On the signup page, you will see a line that says Discount Code -- enter "BIGPICTURE07" and click on update. The first 30 days trial is free, but you will need to enter a credit card number -- as long as you cancel before 30 days hence, you won't get billed.

Happy New Year

Monday, December 31, 2007 | 11:59 PM

in Contrary Indicators

And to all a good night . . .

Market's Back-to-Back Streak

Wednesday, November 28, 2007 | 01:00 PM

in Contrary Indicators | Investing | Markets | Trading

Well, the Christmas Rally we discussed on Monday and Tuesday has finally arrived.

Indeed, like the NY Knicks, the Markets have finally pieced together two consecutive winning days.

Since the decline that began on October 30th, the S&P 500 has gone 19 days without having more than one winning session in a row.

I have been following this ever since my friend Paul first asked about what the failure to have two consecutive back-to-back winning days actually means. I was speaking with Mike Panzner about this earlier in the week. Mike noted:

• The longest such streak (since 1999) was the 24-day run that ended on 9/21/01. The second longest streak was 22 days, which ended on 3/21/01. There have been two other streaks of 21 days each, ending on 10/3/00 and 4/29/02, respectively.

• Except for the post 9/11 streak, which marked a climactic V-bottom low in the equity market, other spans seemed to define the first leg of a downdraft that "paused" for anywhere between 4 and 14 days before it resumed.

• Visually speaking, the pattern that developed when those prior one-day-wonder streaks ended was a "flag," which in technical analysis terms, often implies that a move -- in this case, the downtrend -- is about half-way over.

• For what it's worth, the same also holds true for the two shorter streaks of 16 days that ended on 1/28/03 and 4/1/05, respectively.

• Based on past history, then, it seems that once the current streak ends ( i.e., we see two or more winning sessions in a row), the risk is that it won't be long before the market begins another push lower.

I would add one item to Mike's comments: The wild swings in the markets, +/- 2%, with violent up 200 or 300 point days don't typically come in healthy Bull markets -- these spasms are symbolic of Bear markets.

Citibank Receives Emergency Cash Injection

Tuesday, November 27, 2007 | 05:46 AM

Abu Dhabi to the Rescue!

Late last night, the WSJ reported Citigroup will receive a $7.5B cash infusion from the governmental investment arm of Abu Dhabi (ADIA). Recall that in 1992 -- the last credit cycle problem, and much deeper recession than 2001 -- it was Saudi Prince Alwaleed who rescued Citi by provided funding.

If you thought Citigroup was not in deep trouble, than check out the terms of the deal:

• The investment authority known as ADIA will become one of Citigroup's largest shareholders, with a stake of no more than 4.9%.

• ADIA will receive convertible stock in Citigroup yielding 11% annually.

• Shares are required to be converted into common stock at a conversion price of between $31.83 and $37.24 a share over a period of time between March 2010 and September 2011.

• The stake will exceed that of Saudi Prince Alwaleed bin Talal, long known as one of Citigroup's largest shareholders.

11-frickin-percent!

How's this for ironic: Citibank has essentially become a sub-prime borrower -- only without the advantages of teaser rates!

Here's the best part of all: Futures skyrocketed on the news, and as I am typing this, the Dow is indicating a plus 120 points for the open. Yeah! Rescue plan! Things are so awful, we are going to get a Fed cut -- Whooppee!

I enjoyed Bill King's take on the matter:

"Given the state of the US and global financial system, the likelihood that known ills are only the proverbial tip of the iceberg, the record leverage, trillions of derivatives, an economy in or near recession and a deteriorating housing market that is already the worst since the Great Depression, if one is not now negative, it’s hard to conceive any non-violent scenario that would induce negativity.

The US and global financial system ills are on going, extreme and largely unknown and unquantifiable; plus the Fed is boxed by a terminal dollar and record debt. The Fed realizes that further rate cuts, like the past cuts, did NOTHING to alleviate problems and instead exacerbated problems by crushing the dollar."

The timing is actually quite perfect: Markets are deeply oversold, with several indicators suggesting a bounce was overdue anyway. In a piece titled "The Lonely Bull's Case," my friend Guy Ortmann wrote yesterday that AAII poll, Equity Put/Call ratio, SPX Trailing P/E, IBES Valuation Model and the 21 day Overbought/Oversold Oscillator are all at levels that suggest a buying opportunity.

I only disagree about the duration -- Guy thinks it will have legs, and I think the pop will be a selling opportunity . . .

>
Citgroup, 1 year daily

graphic courtesy of Stockcharts

Source:
Abu Dhabi to Bolster Citigroup With $7.5 Billion Capital Infusion
Government Investment Arm To Become a Top Holder, With Up to a 4.9% Stake
ROBIN SIDEL
WSJ, November 27, 2007; Page A3
http://online.wsj.com/article/SB119613039399104832.html

Breaking the Business Week Cover Curse?

Wednesday, November 21, 2007 | 11:30 AM

in Contrary Indicators | Federal Reserve | Financial Press | Fixed Income/Interest Rates

It's A Low, Low, Low, Low-Rate World.

No, really -- it is. The yield on the 10 Year was under 4% this morning -- briefly kissing 3.99%.

You may be noticing about now that this lies in stark contrast to our prior discussion of Rates and the Magazine Cover Indicator (for more on the magazine cover indicator, see this).

To the wayback machine: Earlier this year, we noted (with an "Uh-Oh") that Business Week's February 19, 2007 cover story on our "Low, Low, Low, Low-Rate World" might be a contrary indicator that rates were about to tick higher. After that article came out, Fixed income rates went lower for a month, then rallied to a new 12 month high.

Things were looking grim for Messers. Mandel and Henry.

However, as the chart nearby shows, Yield on the 10 year has since plummeted. Have Michael Mandel and David Henry broken the "Curse of the Magazine Cover?"

It appears they have. The dominant theme of that February 19, 2007 remains intact: After some volatility, Rates have trended lower. We can quibble about the actual article content, which wasn't exactly forecasting a major economic slowdown or recession -- the likely cause of the current flight to bonds.

However, the key point -- rates are low, and likely to stay that way -- strongly suggests that cover failed as an indicator in this instance.

>
Does this invalidate the cover theory?

Not at all. To begin with, all of these cover indicators are merely anecdotal, rather than quantitative, evidence. As such, it is imperfect, and occasionally wrong. Perhaps interest rates not that big a cultural touchstone.

When it does work correctly, the results can be spectacular -- think of the infamous Business Week "Death of Equities" cover that set up the greatest Bull market the world had ever seen, or Jeff Bezos as Time Magazine's Man of the Year marking the top of the internet bubble.

~~~

Perhaps now someone at Business Week will see their way clear to getting me a copy of that August 13, 1979 "Death of Equities" cover . . .

Sources:
It's A Low, Low, Low, Low-Rate World
Michael Mandel and David Henry
Business Week, FEBRUARY 19, 2007 http://www.businessweek.com/magazine/content/07_08/b4022001.htm

Treasuries Rally as Stocks Drop; Ten-Year Yield Falls Below 4%
Daniel Kruger and Lukanyo Mnyanda
Bloomberg,Nov. 21 2007
http://www.bloomberg.com/apps/news?pid=20601087&sid=a.OYR87ZNPPc&

Previously:

Uh-Oh: It's A Low, Low, Low, Low-Rate World
The Big Picture, February 12, 2007
http://bigpicture.typepad.com/comments/2007/02/uhoh_its_a_low_.html

Rising Bond Yields (or, The Magazine Cover Indicator Lives!)
The Big Picture, June 05, 2007
http://bigpicture.typepad.com/comments/2007/06/rising_bond_yie.html

It's A ~~Low, Low, Low, Low~~ Medium-Rate World
The Big Picture, June 09, 2007
http://bigpicture.typepad.com/comments/2007/06/its_a_low_low_l.html