Monday, December 8, 2014

Cautious retail investors = More room to rally

There have been a number of cautionary signs from sentiment models lately. On the weekend, Barron's featured an interview with Neil Leeson of Ned Davis Research:
Leeson on Friday pointed to his firm’s crowd sentiment poll, which recently clocked in at “extremely optimistic” levels. Chart watchers often consider sentiment to function as a contrary indicator, one that can presage overly enthusiastic markets that are ripe to turn lower.

“This typically is not a great sign for the market going forward, at least in the near term,” Leeson said...

More specifically, Leeson singles out massive money flows into large-cap stock ETFs like the SPDR S+P 500 ETF (SPY) and the SPDR Dow Jones Industrial Average ETF (DIA) as a red flag. In November, all large-cap stock ETFs took in $25 billion, the most ever.
Yesterday, I also highlighted a possible crowded long position from Rydex sentiment data (see My trading plan for December):

On the other hand, the latest release of the TD-Ameritrade Investor Movement Index (IMX), which tracks the equity commitment of TD-Ameritrade accounts, showed that retail investors retreated from their bullishness:

I differentiate the contradictory readings this way, on the basis of different investor constituents and time horizons:

  • Fast HF money: Money flows into ETFs like SPY and DIA reflect the commitment of hedge fund fast-money first and retail funds flow second;
  • Fast retail money: Rydex sentiment measures how the individual swing trading community is behaving; and
  • Patient retail money: TD Ameritrade IMX is more reflective of the behavior of the slower, patient individual investor.
I interpret these readings as the stock market looking a bit overbought in the short-term and may be in need of a pause, but, as the mom-and-pop retail investor isn`t all-in yet, stock prices have more room to rally on an intermediate term basis.


Roman said...

Mom-n-pop were definitely not all-in in crude, probably even haven't heard it can be bought and sold - and yet it dropped like a stone.

WimpyInvestor said...

For intermediate term trading (2 weeks to 2 months), a new set of sentiment indicators appear to be working:

1. AMJ -- when MLP ETFs bottom and rebound, SPY bottom is very close.

2. HYG -- when high yield (which is correlated to oil these days) ETF bottoms and rebounds, SPY bottom is very close.

3. IWM:SPY -- when money rotates to oversold IWM on relative basis, SPY bottom is pretty close.

Perhaps short term price action is driven from sentiment on crude oil, and above indicators seem to reflect hedge fund / high frequency allocation to risk trades.

Price action today was very encouraging for those looking to be own SPY into the best seasonality period in a very long time:

1. Q4 performance when equity fund manager significantly behind benchmark;

2. Presidential Election cycle;

3. Democrat President / Republican Congress;

4. 2015 = Year ending in 5;

5. Year after "three double digit up years in a row"

VIX intra-day reversal, TLT intra-day "black bar" reversal, and NYMO rebound all seem to confirm that December 2014 bottom in SPY is very close.

Most importantly, highest Wall Street Strategist target for 2015 SPY is only 2300, while all the historical playbook scenarios have SPY ending at 2500 to 2700 range.

Any thoughts?

retail investors said...

I think the track record of a sell-side analyst offering advice should be a big indicator if one buys shares of a stock or not...