Monday, 30 January 2012

US investor sentiment to 25 January 2012 indicates an impending decline for stocks

First the charts, then an explanation of why these charts interest me, especially at this time.








Maybe I am foolish attempting to apply logic to financial markets, but I'll attempt to explain how I interpret sentiment figures.

% bullish reflects the proportion of traders and investors who are long. "reflects" is not the same as "measures". It's a rough and ready proportional thing.

% bearish reflects the proportion of traders and investors who are short.

% neutral reflects the the proportion of traders and investors who have their head in the sand, in denial about losing open positions and/or hurting from past losses. As the US bear market has ground on for more than a decade now, it is no surprise that there are lots in this camp.

A high % bullish number such as we have now means that anyone who is likely to buy already has. So there are few remaining potential buyers amongst the bulls.

A low % bearish number such as we have now means that there are few open short positions, and therefore few short positions to be covered. So there are few remaining potential buyers amongst the bears.

So in total (1) there are few remaining potential buyers.

There are lots of long bulls who need to sell to book profits. There are lots of bears itching to go short at the first sign of weakness.

So in total (2) there a lot of potential sellers amongst market participants.

By definition, any historically high or low sentiment reading implies an impending sentiment reversal, which results in market participants taking action to reflect their change in sentiment.

Taken together with (1) and (2) this indicates that we should soon see sellers outweighing buyers, and therefore a declining market.

Is that decline beginning now? Or will the sentiment numbers become more extreme before a turn? Once a decline begins, how far will it go? Sorry, I don't have a crystal ball!

S&P 500 hourly chart bearish trend line break

Yesterday I said that the charts warned us to be prepared for near term weakness across the Undollar complex, and so it has proved. I don't have time to post charts of all today's trend line breaks and rejections. One chart will have to suffice, so I've chosen the Big Daddy.


Will the hourly chart weakness build to become daily chart and then weekly chart weakness? I don't have a view on that at the moment. Near term weakness is all I'm preparing for. But from little things, big things grow. Sometimes.