Research Excerpts

Extremes In Investor Sentiment Led The Late June Rebound In US Stocks

Posted on: Tuesday, July 12th, 2011

In our June 24th Asbury Alert entitled US Market Rebound Emerging From The Recent Lows (access requires subscription), we displayed and discussed several different measures of investor sentiment which  — in addition to other market factors — helped us to catch the sharp  94 point, +7.5% advance in the S&P 500 between June 24th and July 8th.

The following (green highlights) is an excerpt and a chart from that report.

Asbury Alert, June 24th 2011
US Market Rebound Emerging From The Recent Lows

Major underlying support just below the market in the bellwether S&P 500, combined with an extremely bearish and fearful retail investor crowd, establish ideal conditions for a US stock market rebound to begin between now and early July.  Moreover, near term measures of market momentum suggest that this rebound is already getting underway.

Charts 2 and 3 pertain to near term investor sentiment, and actually were previously discussed earlier this week in our June 23rd Sentiment Survey and June 20th Keys To This Week reports. These metrics tends to signal upcoming price direction 3-6 weeks out.

Chart 3 measures investor sentiment according to small retail options traders via the OCC Small Trader Buy-To-Open Put/Call Ratio which appears in the lower panel (blue line).  As the name implies, this data series includes opening positions only on small option orders of just 10 contracts or less.  A bar chart of the S&P 500 appears in the upper panel.

Chart 3

The colored highlights in the lower panel define most (green) and least (red) bearish extremes in this series since 2006.  The corresponding green vertical highlights between both panels show that these traders are currently at a multi-year most bearish extreme right now, and that previous such extremes have coincided with literally every near term bottom in the S&P 500 in recent history.

As a contrary indicator, these data suggest that the US broad market is establishing another similarly-important near term bottom now.

That entire June 24th report is available to Asbury Research subscribers by logging into the Research Center via the button at the upper right corner of the screen.

Professional investors can learn more about our investment research right here on our website including sample reports, client testimonials, our 2010 market calls, and John Kosar’s recent appearances in the media.  You can contact us for additional information online or by calling 224-569-4112.