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

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.

US Stocks: Prices Historically Peak In Early June

Being aware of long term seasonal trends in US financial asset prices can give investors a big advantage in anticipating upcoming investment opportunities — especially when the latest financial data supports the historic seasonal pattern.

Back on June 1st, we wrote a report entitled, US Stocks: June Seasonally Peaks Early In The Month.

CNBC invited us to discuss that report on their Closing Bell segment on June 2nd.  You can view that interview on the Asbury Research website by clicking here.

From that report:

“The month of June is the 3rd seasonally weakest month in the S&P 500 since 1957, following September and February. A further breakdown of this 53-year seasonal pattern shows that the first week of June is the 2nd strongest of the entire 2nd Quarter, while the last three weeks of June are among the weakest of the 2nd Quarter.”

Although Melissa Francis and Bill Griffeth were unclear on what was the 1st week of June in terms of seasonality data (our fault, we did not explain that the “short week” of Wednesday June 1st through Friday June 3rd was Week 1 in calendar terms), the S&P 500 actually peaked for the month during Week 1, at 1345 on June 1st, and has since declined by 87 points or -7% by June 16th, which is Week 3.

Lack Of Post-Earnings Follow Through Led The May-June Stock Market Collapse

Despite a very choppy, sideways-trading market since mid February, our more intermediate term analysis has consistently indicated that the US stock market was in the latter to final stages of its July 2010 advance.

This week’s failure of bullish chart patterns in both the US and Europe, corroborated by a new bearish shift in market momentum as of the close on Monday and further supported by a 53-year seasonal trend, indicate that at least a near term market peak is in place at the recent highs.

Paris CAC-40 Index

Considering that the US stock market is currently over-extended according to a number of different technical measures, we are expecting an initial, and potentially sharp, 7% decline in the benchmark S&P 500, back to major underlying support at the 200-day moving average.

Since that our May 17th report the S&P 500 has declined by 89 points or -7% to test its 200-day moving average on Thursday June 16th 2011.

Money Market Flows Tipped Off The May US Stock Market Decline

Understanding the relationship between investor positioning and the direction of financial asset prices can provide investors with an important edge.

The following (green highlights) is an excerpt from our May 20th Sentiment Survey report, which examines investor positioning in US stocks, US bonds, the Dollar and in economically-influential commodity prices, and points out emerging investment opportunities based on these data.

excerpt from Asbury Research’s Sentiment Survey
The US Stock Market
May 20th 2011

Chart 4 indirectly measures retail-oriented investor sentiment on the US stock market via the

day-to-day flow of investor assets in and out of the money market.

Since investors typically allocate more of their investment dollars to money market funds when they are fearful of a stock market decline, and shift those assets out of these funds and back into equities when they think the danger is over, tracking the day-to-day level of assets in this fund can tell us a lot about the level of greed or fear that investors are feeling about the stock market over the near term.

Chart 4

This 3-panel chart is admittedly a bit complicated, but it essentially defines instances when investor assets are aggressively leaving the money market — presumably in search of a better return

The rightmost red vertical highlight between all three panels points out that that investor assets are aggressively leaving the money market right now, while the other vertical highlights show that previous, similar instances of this have coincided with or led what have been the most important peaks in the S&P 500 (upper panel) since 2010.

During the 3 weeks or so since our May 20th report, the S&P 500 has declined by 76 points or -6%.

What Is Dr. Copper’s Prognosis For US Stocks?

Understanding how different financial asset prices interact with one another can provide a big edge to investors.  We often consult “Dr. Copper” to get his prognosis on the US economy, because the US stock market moves up and down based on investors’ collective opinion on the economy.

The chart below, taken from our May12th Commentary entitled Recent Weakness In Copper A Red Flag For US Stocks, displays the close and stable positive correlation between COMEX copper and the Dow Jones Transportation Index over the past decade.

These two assets are related to one another because copper is used in manufacturing to make just everything you can think of, and the Dow Transports represent the shipping of those manufactures goods.

COMEX copper, Dow Transportation Index since 1999

In that report we said:

“The big negative divergence between copper prices and the Dow Jones Transportation Index since mid February strongly suggests that one of these two assets is temporarily mis-priced.  Based on copper prices’ tendency to lead US equity prices, we believe that the US stock market is the mis-priced, over-priced one — and is vulnerable to an upcoming decline.”

Since that report, the broad market S&P 500 has already declined by 74 points or -5.5% is less than a month, and is threatening to extend its recent lossses.

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