Reversal of Sentiment, Reversal of Direction

Sentiment reversal: hard, fast uptrend, slow downtrend

This 15-minute chart shows just the opposite of yesterday. It illustrates that market sentiment has shifted. On the left side, the green candles moving higher are strong and fast. The red candles on the right are choppy, sloppy and interspersed with green candles, moving downward at a pace that is without conviction. The market has become bullish despite the current downward direction at the moment. I suspect we'll see another reversal somewhere near the flat line, and a higher close.
This surprises me despite that on the daily chart, the trend is still weakly downward  and despite that the news continues to reflect increasing economic weakness.

Market Sentiment: Choppy Going Up, Hard and Fast Going Down

When I see this candlestick pattern (see description next paragraph), I take it as a reading of market sentiment. The S&P 500 is now back to flat for the day. The Dow is lagging behind and is still positive; since the Dow was up much higher in percentage terms, this is not surprising.


Notice on this chart that the uptrend was choppy and sloppy going up, but hard and fast going down. This tells me that traders are uneasy taking a long position, but quick to liquidate and/or short when the market turns. Note on the left the frequency of red, downward candles and long wicks in an uptrend. Note also on the right the lack of green candles and the rapidity of the downward move.

Americans In Morose Mood

from NYT:

Americans are more pessimistic about the nation’s economic outlook and overall direction than they have been at any time since President Obama’s first two months in office, when the country was still officially ensnared in the Great Recession, according to the latest New York Times/CBS News poll.
At a time of rising gas prices, stubborn unemployment and a cacophonous debate in Washington over the federal government’s ability to meet its future obligations, the poll presents stark evidence that the slow, if unsteady, gains in public confidence earlier this year that a recovery was under way are now all but gone.
Capturing what appears to be an abrupt change in attitude, the survey shows that the number of Americans who think the economy is getting worse has jumped 13 percentage points in just one month. Though there have been encouraging signs of renewed growth since last fall, many economists are having second thoughts, warning that the pace of expansion might not be fast enough to create significant numbers of new jobs.
The dour public mood is dragging down ratings for both parties in Congress and for President Obama, the poll found.
Disapproval of Mr. Obama’s handling of the economy has never been worse — up to 57 percent of Americans — a warning sign as he begins to set his sights on re-election in 2012. And a similar percentage disapprove of how Mr. Obama is handling the federal budget deficit, though more disapprove of the way Republicans in Congress are.
Still, for all the talk of cutting the deficit in Capitol Hill and Wall Street, only 29 percent said it would create more jobs — the issue of greatest concern — while 27 percent believed it would have no effect on the employment outlook, and 29 percent said it would actually cost jobs.
When it comes to reducing the deficit and the costs of the nation’s most expensive entitlement programs, the poll found conflicting and sometimes contradictory views, with hints of encouragement and peril for both parties.
Mr. Obama has considerable support for his proposal to end tax cuts for those earning $250,000 a year and more: 72 percent of respondents approved of doing so as away to address the deficit; 24 percent disapproved.
And, in what he can take as a positive sign for his argument the nation has a duty to protect its most vulnerable citizens, about three-quarters of Americans think the federal government has a responsibility to provide health care for the elderly and 56 percent believe it has a similar duty to the poor.
“Keep people’s taxes and give them medical benefits,” Richard Sterling, an independent voter of Naugatuck, Conn., said in a follow-up interview.
In what Republicans can take as a positive sign as they seek a more limited government, 55 percent of poll respondents said they would rather have fewer services from a smaller government than more services from a bigger one, as opposed to 33 percent who preferred the opposite, a continuation of a trend in Times/CBS polls.
And slightly more Americans approve than disapprove of a proposal by Representative Paul D. Ryan of Wisconsin to change Medicare from a program that pays doctors and hospitals directly for treating seniors to one in which the government helps seniors pay for private plans, though that support derived mostly from Republicans and independents, not Democrats. That result was at variance with that of a recent Washington Post/ABC News poll that found 65 percent opposed Mr. Ryan’s plan, suggesting results can vary based on how the question is asked.
Twice as many respondents said they would rather see a reduction in spending on federal programs that benefit people like them than an increase in taxes to pay for such programs.
Yet more than 6 in 10 of those surveyed said they believed Medicare was worth the costs. And, when asked directly about Medicare, respondents said they would rather see higher taxes than a reduction in its available medical services if they had to choose between the two.
Given an option between cutting military, Social Security or Medicare spending as a way to reduce the overall budget, 45 percent chose military cuts, compared with those to Social Security (17 percent) or Medicare (21 percent.)
For the most part, Americans split sharply along party lines when it comes to whom they trust most when it comes to the deficit, Medicare and Social Security.
But with 70 percent of poll respondents saying that the country was heading in the wrong direction, the public is not exhibiting particularly warm feelings toward officeholders of either party.
Most Americans think neither the Congressional Republicans nor Mr. Obama share their priorities for the country. Mr. Obama’s job approval remains below a majority, with 46 percent saying they approve of his performance in office as opposed to 45 percent who do not. And support for his handling of the military campaign in Libya has fallen off sharply since last month: 39 percent approve and 45 percent disapprove. In a CBS poll in March, 50 percent approved and 29 percent disapproved.
Republicans have their own challenges. More than half of poll respondents, 56 percent, said they did not have a favorable view of the party, as opposed to 37 percent who said they did. (The Democratic Party fared somewhat better: 49 percent did not have favorable views of it and 44 percent did).
At a time when the House speaker, Representative John A. Boehner of Ohio, increasingly becomes the face of his party in Congress, more disapprove of his job performance (41 percent), than approve of it (32 percent); 27 percent said they did not have opinion of him.
The general displeasure with office holders of both parties is reminiscent of the mood that prevailed last November, when anti-incumbent sentiment swept Democrats out of power in the House and diminished their edge in the Senate.
Frustration with the pace of economic growth has only grown since, with 28 percent of respondents in a New York Times/CBS poll in late October saying the economy was getting worse and 39 percent saying so in the latest poll.
“They’re saying it will get better, but it’s not,” Frank Tufenkdjian, a Republican of Bayville, N.Y., said in a follow-up interview. “I know so many people who are unemployed and can’t find a job.”

Marjorie Connelly, Marina Stefan and Dalia Sussman contributed reporting.

Consumer Confidence: Not Just the Drop, But the Size of the Drop

from Zero Hedge:

While today's consumer confidence index missing expectations (at 67.5 or the lowest since April 2009) was not a big surprise following our prediction of just that happening when we reported that the Bloomberg Consumer Comfort index hit a 7 month low, what was very disappointing was that the Expectations component had its fifth largest drop in history, plunging from 72 to 58. This is a lower reading than that recorded when the "recession", according to the NBER at least, was still raging. As a reminder the recession ended with "expectations" at 70.

Consumer Sentiment Declines, Stocks Rise on Positive GDP, Earnings

Consumer sentiment in the U.S. dropped more than forecast in March, damped by higher gasoline costs and the effects of Japan’s natural disaster.
The Thomson Reuters/University of Michigan final index of consumer sentiment decreased to 67.5, the lowest level since November 2009, from 77.5 in February, the group said today. The median forecast of 67 economists surveyed by Bloomberg News projected a reading of 68.
Gasoline prices hovering near the highest levels since October 2008 are straining the finances of American households, whose spending makes up about 70 percent of the world’s largest economy. While unemployment has fallen for three months, Japan’s earthquake crisis led to a plunge in stock values, at one point wiping out all of 2011’s gains.
“Consumers are concerned about the rise in gasoline and food prices,” said Ward McCarthy, chief financial economist at Jefferies & Co. in New York who correctly forecast the drop. “People who are now shelling more money out of their pockets every time they fill the gas tank have a whole lot less left over for anything else they want to spend money on.”
Forecasts in the Bloomberg survey ranged from 65 to 71. A preliminary reading issued earlier this month was 68.2. The sentiment index averaged 89 in the five years leading up to the recession that began in December 2007.

It's Ugly Out There As Mood Turns More Grim

Obama's luster isn't merely tarnished. It's corroded!

from WSJ:

Americans are growing more pessimistic about the economy and the war in Afghanistan, and are losing faith that Democrats have better solutions than Republicans, according to a new Wall Street Journal/NBC News poll.
Underpinning the gloom: Nearly two-thirds of Americans believe the economy has yet to hit bottom, a sharply higher percentage than the 53% who felt that way in January.
The sour national mood appears all-encompassing and is dragging down ratings for the GOP too, suggesting voters above all are disenchanted with the political establishment in Washington. Just 24% express positive feelings about the Republican Party, a new low in the 21-year history of the Journal's survey. Democrats are only slightly more popular, but also near an all-time low.
The results likely foreshadow a poor showing in November's mid-term for Democrats, whose leaders had hoped the public would grow more optimistic about the economy and, as a result, more supportive of the party agenda. Now, despite the weak Republican numbers, the survey shows frustrated voters on the left are less interested than impassioned voters on the right to in the election.
"Even with Republicans having low numbers, they are the opposition party and are going to benefit from people saying, 'We're ticked off and we want a change,"' said Republican pollster Bill McInturff, who conducted the survey with Democratic pollster Peter Hart. "The way you vote your discontent is to say you're going to vote Republican."
Mr. Hart said the 2010 contest is being pulled by the sentiment associated with the JetBlue flight attendant who fled his plane via the emergency chute after an altercation with a passenger. Calling it the "JetBlue election," Mr. Hart said: "Everyone's hurling invective and they're all taking the emergency exit."
As in recent polls, Americans are split on President Barack Obama's job performance, with 47% approving and 48% disapproving. But a majority disapproves of his performance on the economy. And six in 10, including 83% of independents and a quarter of Democrats, say they are only somewhat or not at all confident that Mr. Obama has the right policies to improve it.
The survey suggests that Democrats should expect little if any appreciation from voters for legislative achievements such as overhauling the health care and financial systems. Six in 10 Americans rated Congress' performance this year as below average or one of the worst. And the economy is dominating voters' worries. Among those who believe the economy will get worse over the next year, 67% want a GOP-led Congress.
"Several months ago I was very hopeful" said Fort Worth, Texas, public-schools administrator Susan Stitt, 63 years old, an independent who leans Republican. "But in May or so, about three months ago, I just started hearing more and more little things on the news that would chip away at my confidence."
Denis Goulet, 59 years old, a contract manager for Verizon from Calvert County, Md., and a Democratic-leaning independent, said the economy made him "feel like Charlie Brown kicking the football."
"Every time things start looking better, they start looking bad again" he said. Mr. Goulet said he has always voted for Democrats, but doesn't know how to vote this year. "I have gotten as wrapped up as anyone else just trying to stay afloat."
On the Afghanistan war, which had been an area of strength for the president since he revamped his military strategy, 68% of Americans now feel less confident the war will come to a successful conclusion. Just 44% approve of the president's job on Afghanistan, down from a majority who approved in March, the last time the poll addressed the topic.
Voters appear evenly split on which party they hope will control Congress after November. But Republicans retain an advantage among those more likely to turn out. Among those most interested in the election, half favor GOP control and 39% support the Democrats. One positive movement for Democrats: That 11-point gap is down from 21 points in June.
Democrats and the president retain strong approval among minorities. But they are losing some groups that helped the party take control of Congress in 2006, particularly working-class whites. Among whites with less than a college education—a group the two parties split in the most-recent midterms—the GOP has a 16-point advantage, 49% to 33%, when voters were asked which party they wanted to control Congress.
Republicans, meantime, are gaining ground on a number of issues that have traditionally been advantages for Democrats. More Americans now think the GOP would do a better job on the economy—an advantage the party last held briefly in 2004 but has not enjoyed consistently since the mid-1990s. On one of the Democrats' core issues, Social Security, just 30% now think the party would do a better job than the GOP, compared to 26% who favor the Republicans. That margin was 28 points in 2006.
"The Republicans don't have a message as to why people should vote for them, but it's pretty clear why you shouldn't vote for the Democrats," said poll respondent Tim Krsak, 33, a lawyer from Indianapolis and independent who has been unemployed since January. "So by default, you have to vote for the other guy."

The "Dumb" Money Gives Bearish Signal

from the Technical Take blog:
Investor sentiment continues on the same path as the two previous weeks as the "Dumb Money" indicator is moving to new bullish extremes. Typically, this is a bearish signal.

The "Dumb Money" indicator is shown in figure 1. The "Dumb Money" indicator looks for extremes in the data from 4 different groups of investors who historically have been wrong on the market: 1) Investor Intelligence; 2) Market Vane; 3) American Association of Individual Investors; and 4) the put call ratio.

Figure 1. "Dumb Money"/ weekly

Going back to early March, 2009, the "optimal" time to buy into the market was when the S&P500 closed at 756.55 on March 13, 2009. The "optimal" time to sell was at the close April 17, 2009 with the S&P500 at 869.60. This represents a gain of 15% gain over 5 weeks or 3% per week. This is annualized to a 156% gain, and this is what one would expect at the bottom of the price cycle when the trend changes from down to up. We get an acceleration of prices higher.

From our "optimal" sell signal to this past Friday's close, the S&P500 has gained 9% over 8 weeks or 1.13% per week. This is annualized to a 59% gain, which isn't too shabby but certainly less than the move from the "optimal" buy to the "optimal" sell signal. As an aside, "optimal" doesn't mean best. "Optimal" assumes all occurrences over the length of the observable data. Could the "sell" signal have been better timed? Yes, but over the past years the "optimal" time to get out of the market and protect profits was the "optimal" sell signal. We should note that the "Dumb Money" indicator had yet to move to a bullish extreme, and we were basing our signals on prior bear market experiences.

Then on May 8, 2009, the "Dumb Money" moved into the extreme bullish zone, and this is a bear signal. On May 8, 2009, the S&P500 closed at 929.23. Since that time the S&P500 has gained 1.8% over 5 weeks or 0.36% per week. This is annualized to a 18.72% gain. Once again, this isn't too shabby, but clearly much less than the move off the bottom or from our initial "optimal" sell signal.

Yet, with the "dumb money" now bullish to an extreme, this is the part of the price cycle that appears to be attracting the most attention and most acceptance from investors. Yet, this is the part of the price cycle where the markets haven't gone anywhere. It does seem kind of odd -doesn't it? The time to have been bullish was when investors were fearful.

To embrace higher prices with sentiment so extremely bullish, you must embrace the notion that we are in a new bull market. You must embrace the notion that higher oil and higher interest rates don't matter. You must embrace the notion that second derivative growth will lead to real, sustainable growth. You must embrace the notion that our housing and commercial real estate troubles are all behind us. You must embrace the notion that a PE of 150 on the S&P500 doesn't matter. You must embrace the notion that we can have an economic recovery without any meaningful change in unemployment. And we can go on and on and on....

I have picked my poison. It is a monthly close over the simple 10 month moving average on the S&P500. Once this occurs, I will add equity exposure (that is adjusted for the inherent risk of the asset (equities) and adjusted for the other assets in my portfolio). Personally, I don't like it, and this is at odds with my own analysis that leads me to state that this is not the proper launching pad for a new bull market in equities. But then again, the market cares little what I think or do. Nonetheless, this is how I am choosing to play it. The Faber strategy, which I discussed last week, is a strategy that helps me manage money and manage risk. It is not a "call" on the markets.

For the record, the "Smart Money" indicator is shown in figure 2. The "smart money" indicator is a composite of the following data: 1) public to specialist short ratio; 2) specialist short to total short ratio; 3) SP100 option traders.

Figure 2. "Smart Money"/ weekly