Additional bull vs. bear observations on sentiment and technicals for equities markets, from Salamone and White at Schaeffer's Monday Morning Outlook

The Monday Morning Outlook from Schaeffer's once again has great points to make about sentiment and the technical context for equities markets; at Monday Morning Outlook: Are We Entering Summer Trading Range? Big swings in sentiment as technical backdrop improves, by Todd Salamone (6/20/09). For example, Todd Salamone points out that: "The good news for the bulls is that both indices remain above their 200-day moving averages, as some of the short-term optimism that was creeping into the market begins to wane. Retail investors, for example, have been deflated by the price action during the past few weeks, as the latest American Association of Individual Investors poll indicated that only 33% of those surveyed are bullish, which is down from the 48% that were bullish on June 4.

"Option players have tempered their outlook too, as the 10-day moving average of the International Securities Exchange all-equity buy-to-open call/put ratio has dropped from the mid-May and early-June highs in the 180 area to the current reading of 156. The current reading indicates less call buying (upside bets on a stock) than put buying (downside bets on a stock) relative to the early-June levels."

This coupled with the S&P 500 being above its 200-day simple moving average (although not its 200-day exponential moving average), helps the bullish case. He makes some remarks comparing SPX historial volatility to the VIX, as well as some observations about possible implications of options buying activity not only in the SPX but the retail sector (XRT) and energy sector (XLE).

Todd closes with a reference to an article on Reuters (ft.com), Funds move to overweight stocks – Merrill poll (6/18/09) – which they've summarized with Bernie Schaeffer adding his comments at Schaeffer's Media Outtake: Short Memories on the Street Astounding swing in sentiment ["media outtake" doesn't mean it's a video, it means he's commenting on articles published elsewhere in the media]. As Bernie puts it, "The swing over the course of just two months from 70% of money managers believing a global recession is likely next year to just 7% is simply astounding."

The review continues with Rocky White's Indicator of the Week: The Yield Curve. I'm glad he's addressed it because it is important to keep an eye on this. As he correctly points out, there's been a flurry of articles recently about the ratio between short-term and long-term bond rates. He says: "One camp sees the recent spike in long-term bond rates as bullish for the stock market, explaining that investors are gaining confidence and therefore seeking riskier investments. The second camp explains that higher 10-year rates signal that the U.S. is becoming burdened with debt, and therefore less credit-worthy and/or that inflation is on the horizon. In this article I do not attempt to predict what the steep yield curve foreshadows; however, I will take a look back to see what a steep yield curve has meant in the past." As Rocky shows, the interpretation isn't simple or straightforward either way; and he pulls some quantitative historical data to help, which shows that the ratio right now can be helpful for the bullish case.

But then again, he also graphs out the relationship between the 10-year yield tracking closely with the S&P 500, and he must be thinking as we are that the 10-year yield looks ready to come back down again. You'll want to see his chart of how this ratio looked in 1987.

Once again these observations and comments make very good reading in your preparations for the upcoming week. Whether you're feeling bullish or bearish, I can recommend reviewing them this weekend.