Tuesday, July 23, 2013

Time for a pause?

As the Dow marks another new high, my review of sentiment models are raising questions as to the power of the current bullish impulse for US equities. Marty Chenard of stocktiming.com monitors institutional flows and his analysis shows that institutions have not been buying as the market has risen, though the level of selling has fallen:
Take a look at today's chart and you will see the concerning behavior we are talking about. First, note the Institutional Buying was a little higher on Friday, but it has essentially moved sideways since July 9th. Unlike the market in its buying binge, the Institutions have been merely "holding their own" relative to any new buying. 
Now take a look what the Institutional Selling looks like. It didn't move sideways, it moved DOWN significantly.   This means that they sold less and less as the market went up.   That behavior "allowed" the market to go up on its own without any significant selling actions that would pull it down. 
From a behavioral standpoint, allowing the market to rise higher would benefit you if you wanted to sell at a greater profit later.   My point here is that the the Institutional Investors have not been participating in the current move, but have been acting as "enablers", allowing the market to move higher while not exhibiting actions that support it.

In the meantime, individual investor sentiment appear to be at or near overbought levels. The latest AAII sentiment report (via Bespoke) shows that the bull-bear spread at bullish extremes, which is contrarian bearish:

Under these circumstances, I can't get wildly bullish about stocks here. These readings suggest that, at a minimum, stock prices are likely to pause consolidate sideways, if not correct downwards.

Cam Hui is a portfolio manager at Qwest Investment Fund Management Ltd. ("Qwest"). This article is prepared by Mr. Hui as an outside business activity. As such, Qwest does not review or approve materials presented herein. The opinions and any recommendations expressed in this blog are those of the author and do not reflect the opinions or recommendations of Qwest. 

None of the information or opinions expressed in this blog constitutes a solicitation for the purchase or sale of any security or other instrument. Nothing in this article constitutes investment advice and any recommendations that may be contained herein have not been based upon a consideration of the investment objectives, financial situation or particular needs of any specific recipient. Any purchase or sale activity in any securities or other instrument should be based upon your own analysis and conclusions. Past performance is not indicative of future results. Either Qwest or Mr. Hui may hold or control long or short positions in the securities or instruments mentioned.


keithpiccirillo said...

I've been thoroughly reading Jeff Saut's recent running commentary and he thinks a dip is imminent, but thinks it will be a buyable dip.



Anonymous said...

The chart of institutional buying/selling has the odor of data cherry picking. No disrespect intended but the amount of data displayed doesn't show anything of value. A larger sample is necessary to document that in fact during some prior upswings there was strong buying and during some prior downswings there was strong selling.
It just may be that the falloff in institutional buying that is shown may only mean institutions are far more bullish, have finished their window dressings for end of month and quarter and are expecting the Fed fueled rally to continue.