Well, I don't disagree with that assessment at all. And that reference to sentiment reminds me of something in Todd Salamone's Monday outlook article today. As usual, I like to check on what he writes each Monday at Schaeffer's Research (link included in list at right). Now, Rocky White [Senior Quantitative Analyst] is also providing interesting analysis with these Monday outlook articles. So let's take a look at key quotes [some charts omitted] from their article today - but then, I've got a few comments of my own to add:
=============What the Trader Is Expecting in the Coming Week: Is Your Glass of Seasonality Half Full or Half Empty?
By Todd Salamone, Senior Vice President of Research
Hope is slim for the bulls, as the January Barometer points toward additional market losses
News headlines and daily price action continue to generate anxiety and excitement among market participants, but on a net basis, the broad market is going nowhere fast. The past 2 weeks can be characterized as a titanic struggle between the bulls and the bears, with the bulls defending 8,000 on the Dow Jones Industrial Average (DJIA) and 820 on the S&P 500 Index (SPX). Meanwhile, the bears have gained control when the SPX approaches the 900 area and its 80-day moving average, which is now at 887.12. This region nearly marked another top for the SPX last week.Following the September-October 2008 decline that pushed the SPX 34% lower (from peak to trough), some may view the current range-bound market environment as a glass that is "half full," while others may view it as "half empty." The glass "half full" folks suggest that the market is "probing for a bottom," as it searches for a base amid negative news on the economy. The glass "half empty" folks point to other "basing periods" that have occurred within bear markets – namely the periods between October 2001 and April 2002, January and February 2008, and July and August 2008.
There is no doubt that there is some fear in the market, but there is also a large contingent of investors who continue to hold out hope, thus representing future selling pressure. This hope is built upon the promise of a new presidential administration, a belief that a second-half recovery is on the horizon, and massive ongoing economic stimuli. Given the unhealthy technical backdrop for the market, and the absence of panic, fear, or despair among market participants amid terrible economic news and unimpressive earnings, we view the glass as "half empty." As such, we see growing risk that the late-2008 lows will eventually be taken out.
The fact that the market has been unable to establish a "V-bottom" following the September-October sell-off and the seasonally beneficial November-January period should be cause for concern. In other words, the market behaved as expected in traditionally weak months, but has not performed as expected during traditionally strong months. In fact, the SPX was down a disappointing 14.2% for the historically strong November through January period. The price action during the past 5 months has confirmed that we remain in a bear market environment, given that bearish tendencies are magnified during months of negative seasonality and that positive seasonality has brought about negative returns.
Speaking of seasonality, we analyzed the DJIA's performance in the 3 months, 6 months, and 12 months following the November-January period dating back to 1950. In all 3 time frames, the Dow has performed significantly better following a positive November-January period. So, we continue to have concerns for the longer-term market prognosis. At the same time, choppiness could continue to be the order of the day in the weeks ahead, as sentiment indicators are not at the extremes that usually precede big directional moves. ....
... The VIX, meanwhile, is sitting right at a half-high of its October 2008 peak and its 160-day moving average, but still remains below its 80-day moving average. Moreover, the VIX has traded at a significant premium to the SPX's 20-day historical volatility during the past 20 days - a positive for the bulls. In late August through mid-January, the VIX traded at a discount to the SPX's 20-day historical volatility, and such complacency was indicative of a difficult time for the market.
Turning to levels to watch, the 750-800 region remains as solid support for the SPX, from both a chart and option-related perspective. Put option traders are buying protection on moves below 800, and buying put protection on significant moves below the old lows in the 750 area. Moreover, 750-800 is a "breakeven point" for traders and investors who bought the lows 6-7 years ago, as well as those who bought the lows 3 months ago. Unless and until these levels break, we are not likely to see panic selling emerge. ...
A negative for the market is the relative optimism among equity option buyers amid the market weakness. For example, the 20-day moving average of the International Securities Exchange all-equity call/put ratio continues to roll over from its early January peak. The 20-day moving average of this ratio is currently at 146, which is high relative to the 106 reading last March, the 114 reading in mid-July, and the 108 reading in early December. ... [note - closed ~125 today]
... For those of you who follow seasonal patterns, February would support our current neutral-to-bearish view for the short term. During the past 100 years, the average return for the month of February on the Dow Jones Industrial Average is -0.8%, with positive returns 51% of the time. February is 1 of only 2 months with average returns that are negative (September being the other).
Indicator of the Week: The January Barometer
By Rocky White, Senior Quantitative Analyst
Foreword: January is finally finished, and it was quite a rough month, as the Dow Jones Industrial Average (DJIA) lost nearly 9% during the first month of the year. With this in mind, we are going to take a good look at the January Barometer this week. It has been said that January sets the tone for the rest of the year, and the numbers seem to support this idea.In fact, after comparing DJIA returns for January with the average's returns for the rest of the year – dating back to 1950 - the results are striking. In the 39 times that January was positive since 1950, the Dow averaged a 9.76% return for the rest of the year, with positive returns occurring 82% of the time. Meanwhile, the Dow lost an average of 0.02% for the year when it finished January in negative territory, which occurred 20 times since 1950. Furthermore, the rest of the year saw the venerable average log positive returns less than half the time.
Big January Moves: As mentioned earlier, January 2009 was a particularly rough one. Along these lines, returns for the rest of the year become even more negatively skewed if January sees a big move in either direction. Specifically, the Dow vastly outperforms when it rallies at least 3% in January. However, when the average falls at least 3% in the first month of the year, the returns are considerably lower, with positive readings occurring less than half the time.
Short-Term Outlook: All right, we have established that January is a good barometer for the rest of the year. Let us take a shorter-term view. Is January a good barometer for February? When January is positive, February usually follows suit, with an average return of 0.51% since 1950. However, a negative January is usually followed by a negative February, with an average loss of 0.67%.
Implications: We know January is a good barometer for February and for the rest of the year. This January was awful. Therefore, should we get out of the market or go short? Of course not -- at least, not based on this 1 indicator. ...
Well, it's great information. Frankly on the basis of that information as well as what we are seeing in the charts, I must beg to differ with Rocky's conclusion on implications ... meaning, I do recommend being either short or in cash, unless and until the S&P 500 can make 848 support and then rise above the January 6 highs. Yes, it's obvious that the Nasdaq outperformed, and there are some Elliott Wave analyses that would have the technology sector leading the markets into the future. But that doesn't make this the right time to be long any of the broad equities markets.
My post earlier this afternoon about the "top bullish" and "top bearish" at ISE does identify some companies that could be candidates for long positions - MO and KO - based on the extreme sentiment readings ... But this also should not be taken as a recommendation for a long investment position in these companies. That is, they may be good candidates for that, but I'd look for other confirmation before locking into any long-term investments. Extreme sentiment like that can be good for a swing trade - not necessarily the same thing as a "set it and forget it" type of investment.
Indeed, there are plenty of "set it and forget it" investors in the markets who haven't yet sold and who might get sucked into panic selling if the November 2008 lows are taken out. This is one reason why, if those lows do give way, it's advisable to sell (if one hasn't already) and ask questions later. Don't freeze and watch your "investments" melt away.
For those who cannot or don't like to go short, or who don't like to trade and would rather buy securities for longer time-frame horizons, cash is not a bad place to be!
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