Thursday, April 16, 2009

A Few More Bearish Flags Going Up

Click on Chart to Enlarge

In recent days I have highlighted some potentially bearish (for the intermediate term) readings from the equity put/call ratio, market breadth (% stocks up and % volume up, etc.), the VIX, and the VIX/VXV ratio. Other notable excessive bullish activity I have not mentioned on the blog is evident from Rydex fund flows which are showing multiyear lows in money going into bearish funds and also very high flows into bullish funds.

One holdout area in the last few weeks has been sentiment surveys. However, things have begun to change in that regard as well. The chart above is a chart I made showing the bullish % from the Investor's Intelligence survey for the majority of this bear market. I have overlaid 1.5 standard deviation bands on the chart to help identify relative extremes in the data. First, notice that the bullish % has reached levels just beyond the January highs and is at the highest level since last May. Neither of those times were good times to be bullish. Also, note that the most recent data point is outside the upper standard deviation band. This particular survey is of investment advisors and newletters. So we see that the advisory crowd is once again starting to get bullish after the market has risen sharply. This has historically been a good contrary signal meaning we should expect stocks to level off or decline in the intermediate term.

I have not posted charts of the AAII survey because it is not showing extremes, but bullishness has jumped a good bit there as well and is on par with the highest levels of the bear market barring last May and this January which showed more bullish opinion than currently. This is my favorite survey to look at for timing purposes, and readers may remember the post I made about a day before the recent March 6 bottom showing that the survey was at an all time bearish high. Then what do you know.......the market launched a major rally almost immediately.

Click on Chart to Enlarge

This chart is a re-creation of a proprietary indicator from They have what they refer to as the buy confidence (aka Smart Money) and sell confidence (aka Dumb Money) indicators as the main chart on the home page of the site. I have reproduced the dumb money confidence in a slightly different format than on the site. As of yesterday the dumb money confidence jumped to levels rarely seen and on par with the highest levels reached at prior bear market peaks. The only times in this bear market the dumb money confidence reached this level was 4 days before the May 19th high and the day after the January 6th high. Also I have placed 2 standard deviation bands around the data. As a statistics review, 2 standard deviations should containd 95% of all data. So we know we are seeing an extreme when a reading exceeds those bands. Even if "the bear market" is over, it seems VERY likely that prices will pull back a good bit starting sometime very soon.

While I have not shown the Smart Money confidence here, it is at the lowest levels seen for the entire bear market. The last times the Smart Money confidence were this low were 3 days before the May 19th high last year, and the week after the Oct 2007 bull market high in the S&P 500. So both these indicators have been very good at zeroing in on major peaks in this bear market. Because of all the things I mentioned on the blog in recent days, I have to feel more confidence that we are days away from a significant high (if we have not seen it already).

As a side note, any new readers wanting to participate in blog trades should take look at the post I made this morning regarding exit instructions, etc. Also, "Best Posts" section of the blog has some useful posts to help get aquainted with blog methodology, money management ideas, and technical analysis, etc.

Also stay posted as the short-term model for the S&P 500 is nearing overbought, and with the weight of evidence piling up in favor of a bearish outlook, I will want to recommend a trade on this, probably BGZ, because we may be able to get in very near a major high and hold for several weeks for a large gain.



  1. Hi

    I've just come across your blog, which I've bookmarked. You're providing some excellent information. Thanks.

    The case for a reversal from these levels is looking very strong, as you explain. I too am short now and may well take your advice and start a position in BGZ.

    A quick point. Your image of the dumb money sentiment displays your IB account number in your Windows toolbar, which you might want to edit out.

  2. Thanks Chris

    Since I do not try to advertise or direct traffic to my blog in any way, I haven't really been concerned with those screen shots, though I've thought maybe it would be best to avoid having that there. But thanks for the heads up.

    Just as a quick note, I have exclusively recommended leveraged ETF's on the blog for a few reasons, though usually just the 2x ETFs. I don't know any of your background with trading, but you may want to read some of the best posts, etc on the blog to get some background on how I manage trades on the blog.

    Because the style is a mean reversion style, stop losses theoretically hurt the performance of the trades in the long run. so I don't typically suggest a stop loss on blog trades initially. After a day or so into the trade, at times I will suggest a stop.

    So realize that a 3x leveraged ETF will move a lot and it is very dangerous to trade if you have any issues with taking a loss on a trade.

    I'm sure you know all this stuff, but since I give specific trading advice on the blog, I just want to make sure you know.

    Hope you enjoy.

    Take care

  3. Hi Peter

    Thanks for your comments and concern about my trading risks.

    I have frequently traded 3x iETFs and in fact I've been long FAZ since 9.0 with another position in SRS.

    Most of my trading has been scalping, however I'm moving towards a swing trade style, which provides a better risk/reward ratio IMO.

    You were right in predicting a market fall, and if it continues downwards, as I believe it will, then I will add to my shorts including BGZ, probably tomorrow once this down turn has been confirmed.

  4. Chris

    From your link on your ID, I figured you were experienced, but just wanted to make sure.

    Congrats so far on FAZ and SRS. Since the "e" wave (by my labeling in recent posts) was retraced so quickly and last week's S&P low was exceeded, Friday has the appearance of a multiweek high. So my stance is to set an initial stop at last week's low in BGZ, SRS, FAZ, etc, (or even a breakeven stop) and ride this thing until the whole rising wedge is retraced.