S&P500 vs AAII Bullish Index

My pal Mike Panzner sends along this chart showing that we are getting to an extreme in sentiment:

Spxaaiibulls

Chart courtesy of Mike Panzner’s Armageddonomics

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That suggests a bounce, and I cannot say I disagree. Where I may be more circumspect then some of my more bullish brethren is what you should do with that bounce . . . .   

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  1. Steve Barry commented on Jul 11

    This indicator has failed the last couple of times, unless your horizon is days, not weeks. It also is a survey. I use Total Put/Call as a sentiment indicator based on actual money being put down. When the 10 day MA gets near 1.25, you can start covering shorts, IMO. Could take a few weeks. Don’t go long however…just cover temporarily.

  2. Vermont Trader commented on Jul 11

    You guys and your bounces….

    Please give me one reason why the market should have a tradable (by tradeable I mean you can hold overnight) bounce besides the fact that it is oversold..

    This isn’t a time to be greedy.

    Just focus on keeping what you have..

  3. VoiceFromTheWilderness commented on Jul 11

    This is a perfect example of why technical indicators can be misleading.

    The period covered in the chart is not a representative sample of the range of human sentiment toward the stock markets. The 90’s were a once in a lifetime level of stock market exuberance. The recession of 2001 did little to hurt the value of companies that were not directly internet related. In general the recession of that period was mild. Since then the party has continued — bulls being extravagantly optimistic about the return of the 90’s stock market. Conversely, what is happening out in the real world is a once in a hundred years low. Things are going to get much much worse in the economy, and in the corporate bottom line.

    Please, go long all the stocks you like. Please. I could use the boost.

  4. SPECTRE of Deflation commented on Jul 11

    All of you inflationists are about to learn a once in a lifetime lesson. The demand destruction about to be unleached on the world will be history book material. The total amount of credit/debt being vaporized will amaze all. Brave new world gang.

  5. catman commented on Jul 11

    Frankly they should be depressed, but that doesnt mean they have any readies to buy this market up again, and I think it would be a mistake to try. Today and Monday could easily get ugly. If the fighter jets buzzing over Israel get loosed sentiment indicators will be overwhelmed.

  6. Steve Barry commented on Jul 11

    Voice is right…the chart shown is basically a bubble era chart. Why would anyone want to try to go long on the eve of a possible depression? Cover shorts, maybe…even that is debatable. I just checked the new short interest numbers on QQQQ, GOOG, AAPL, RIMM, MSFT…very laughable. There will be no squeeze on QQQQ.

  7. catman commented on Jul 11

    As usual everyone wants to call a turn. Its the egotism of being first and being right. Garzarelli syndrome? Take a look at the screen in front of you. You can at least avoid flying glass by hiding under the desk. I learned that at PS 106!

  8. theinvestingspeculator commented on Jul 11

    I think the market is putting in a near-term bottom. It looks like the S&P 500 doesn’t want to go much below 1235. The market is very over sold. We just need some good news. Over the next 2 years I think we will go much lower, like david tice.

  9. SPECTRE of Deflation commented on Jul 11

    Basing decisions of personal finance on a dead cat bounce using TA is crazy. We are entering the Twilight Zone, and it’s as scary as any damn thing you can imagine. I guess the wonders of wall street have finally figured out how to draw blood from a turnip, found the money tree we all need to grow, and the tooth fairy will swoop in any moment with fairy dust.

  10. bdg123 commented on Jul 11

    Sentiment is so arbitrary and has failed so many times over the last one hundred years that anyone using it to trade would be bankrupt long ago.

    I understand Barry’s point is not to use this as an initiation of a trade just that we are seeing bearish sentiment but even in the greatest bull market in history, those oversold points are quite arbitrarily picked using hindsight. That dotted line is curve fitted using hindsight and so are the oversold points. There are dozens of oversold points that were false signals. Frankly, using the broad market, AAII sentiment hasn’t been usable to make more than a few percent so far in 2008. That is, if you were arbitrarily lucky enough to pick the right level of oversold in the sentiment survey…..which is pure luck given oversold is relative.

    There have been many instances where markets went down for years and sentiment was negative. Wall Street saw outflows for a decade in the 1970s. We get six months of it and the prognosticators are telling us how the clownish individual is leaving the market and by implication it is time to buy. The only clowns this cycle are the professional sort. Like Bozo.

    We could easily drop another ten percent in a month. Doesn’t mean we will but I wouldn’t bet against it. Maybe the more appropriate sentiment indicator to be using right now is that this was the worst June in the stock market since the onset of the Great Depression.

  11. catman commented on Jul 11

    Just like PS 106 its important not to scare the children. Hiding under the desk will save you from flying glass, but, the shock wave will still incinerate you, leaving an ash shadow on the nearest wall. You have to keep an open mind.

  12. Ironman commented on Jul 11

    I have to say, I love that name: Armageddonomics!

    That said, my sense is that there’s at least a short term trading opportunity and, if certain financial institutions finally get around to pulling the trigger on cutting their dividends, a longer term buying opportunity after the dust clears.

  13. Mike in NoLA commented on Jul 11

    I think Barry’s in the ballpark. I think he has a good gut feeling as much as anything. CNBC hosts look lost and panicky since they’ve never studied history and know this happens sometimes. VIX is up past 28.5. Paulson and W have to issue statements. Sorta like just before the BS rescue.

    Was hoping to get another 7-8 points out of my SDS and EEV, but we may be getting close to a bounce by sometime next week. Could be initiated by something like an emergency rate cut if things look too dire or if Paulson is forced to do something with FNM that will give the cheerleaders something to cheer about even if it just delays armagedon.

  14. catman commented on Jul 11

    Mike – Sometime next week might be a long way away.

  15. DL commented on Jul 11

    If the VIX gets to 35, it would be worth buying a few SPY call options.

  16. Peter Davis commented on Jul 11

    One thing that I think people completely forget: in bear markets, sentiment indicators work completely differently. In bull markets, bearish sentiment is typically bought and leads to the continuation of the rally.

    In bear markets, however, sentiment can, and often does get stretched far past what conventional wisdom considers to be extreme. In other words, very bearish can and does become extremely bearish.

    Past crashes (1929, 1987) and even past significant declines have occurred when sentiment and momentum oscillators were all extremely bearish. The crash of 1987 occurred after 3 successive, brutal down days, each worse than the previous, and each on heavier volume.

    Sentiment and momentum are secondary indicators for a reason. Everyone wants to call a bottom, I believe for a few reasons.

    1. Most people are inexplicably long-only traders. This leaves them with no plan in down markets.

    2. Most people rely on hope, and see what they want to see and what they’re hoping for. Many people want the market to rally, because they do not go short or are still holding onto long positions.

    3. The past 25 years have seen few declines. We’ve come to be conditioned by the idea that the market cannot go down substantially. I think this is actually reinforced by the 2000-02 bear market, which has left many people feeling that it can’t possibly happen again so soon.

    Trying to pick a bottom in a market like this is dangerous. If we do rally, give it a chance to prove itself. Don’t jump in on the first up day. Markets do not go straight up or down. One big up day does not make a rally, just as one big down day doesn’t make a selloff.

    See the whole field, not just what you want to see.

  17. Mista B commented on Jul 11

    I agree with Peter. Buying dips works great in a bull market. Buying dips in a bear is foolish. If anything, wait for sentiment to go bullish, then short.

    I keep hearing the pundits on TV talk about how oversold we are. They don’t even know what they’re talking about. Do they ever mention how overbought we are in a bull? Of course not. Nor should they. Oscillators go to extremes early on in trends–and stay there. Thus in a trend up ocscillators quickly register overbought conditions, and the market continues to rise. The strategy is to get in, then wait for a dip to add. Same thing for a bear. Oscillators will quickly get oversold and stay there. It’s when they move to an overbought condition that you can add to your short position.

    The trend is clearly down. Anyone who doesn’t see that is hopefully blind. Lower highs. Lower lows. Moving averages are all pointing down.

    A bounce may be imminent, but I think it happens at lower levels, like Dow 10,500.

  18. PureGuesswork commented on Jul 11

    An interesting sentiment indicator might be the comments to this post. They are overwhelmingly negative. We are getting to the point that simply suggesting the market will not go down forever is greeted with a chorus of scornful growling. It is kind of the inverse of “it’s different this time.”

  19. Jim Haygood commented on Jul 11

    Ditto, PureGW!

    Criticize sentiment all you like. But when the market has been pounded for weeks (an unusual event), an equally unusual bounce is sure to occur somewhere along the line.

    Yet the herd screams, NUTS! IMPOSSIBLE! Even when today’s 791 new NYSE lows were the sixth highest in history, just beating out the 784 new lows on 9/21/01. And what happened on the Monday morning after 9/21/01? Look it up in the history books.

    Well, I made some money on the short side. But soon it will be time to make a little on the long side. Nothing is one way, not even a bear market. Need a good 10% pop here, to reload shorts. Hit it, boys!

  20. bdg123 commented on Jul 11

    Highest new lows in history is irrelevant. That’s because there are most stocks traded. Percentage of new lows is more relevant. We have a long way to go on that one if you want to be all-time oversold.

    I didn’t see anyone on here state the market couldn’t rally. Or, that we were going straight to zero. That complacency that those bearish are clowns because the market can’t sweep down drastically and that rallies are somehow imminent because of the grace of God is preposterous. We’ve had many declines, including ones that lasted years, that did not have substantial rallies. 5-10% on the upside, which is all we have seen for nine months in major averages aren’t really rallies at all.

    This god given right notion of rallies is one reason why we haven’t had a bottom

  21. ben commented on Jul 11

    Mike in Nola,

    I see you post a lot, seems like you have ETF shorts. I’m in FXP, it’s doing well.

    Can’t wait till olympics are over, it will do even better then.

  22. ben commented on Jul 11

    tradeable bounce, hmm, you got that today, we went up from 10980…. that was it.

    Funny, I haven’t seen any of those dow 6k calls on here lately, everyone is just S&P 800 now that the money maker (oh wait, no he’s not) Tice said so on this site.

  23. Mike in NoLA commented on Jul 11

    ben:

    Had some FXP’s for a week or so last March. Made a few quick bucks, but figured that the Chinese gubment had so much control of the markets they could screw with them. So, I bailed.

    Boy was I wrong!

  24. Troy commented on Jul 12

    FWIW I rode my SRS from 101 to 111 this week and put half of the profits straight into BAC LEAPS calls @ 27.50. WIth a current divie of 12% anybody putting major money into BAC is either going to be broke or set for life, assuming cashflows don’t get pummelled for too long.

    Essentially I paid $3000 for the right to buy in at the 8% divie level this year and next. If BAC tanks such to wipe out the options, the stock will be cheap enough to pick up directly should the company’s longer term prospects make any sense.

    But if BAC tanks to zero I don’t think even GLD is going to save us.

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