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January 04, 2011 – Comments (15)

Here are some observations that point to some elevated risk here

1) Dumb money is still quite bullish at historically very high levels, and smart money is not so much - http://pragcap.com/the-dumb-money-is-bullish. See this chart:



2) Majority of analysts see only upside for the S&P now. Even 'low' estimates now call for end of year 2011 gains - http://money.cnn.com/2011/01/04/markets/investment_outlook_survey_stocks/index.htm. See this chart:



3) History doesn't really jive with being hugely bullish here. Looking at the average progression of a few historical bear markets would suggest this is a spot to start looking defensively http://pragcap.com/is-this-your-average-secular-bear. See this chart:



FWIW, I am not predicting a crash here. Just a correction. If anybody is interested, I posted some thoughts here: http://marketthoughtsandanalysis.blogspot.com/2010/12/weekly.html

15 Comments – Post Your Own

#1) On January 04, 2011 at 2:33 PM, outoffocus (23.29) wrote:

I agree with your sentiment.  Even CAPS is incredibly bullish right now.  Check the year end DOW predictions for this year. I think all except 2 or 3 predictions are actually bearish. Ultralong is mildly bearish but not by much.  Seems like everyone thinks Bernanke is going to print our way to prosperity.

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#2) On January 04, 2011 at 4:24 PM, rfaramir (29.41) wrote:

We know that Bernanke is going to print his way to the dollar's demise or awfully close to it. This is bullish for stocks in the sense that their dollar value will rise, but it may or may not be a real rise.

In terms of gold, I'm not sure if stocks will rise or not. Gold will likely act as both inflation hedge and alternate currency. Its currency aspect is mostly buoyed by it uninflatability. Only business ventures really make money, gold is just a safe place to park it, a store of value as bonds get risky with governments defaulting all over the world.

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#3) On January 04, 2011 at 4:36 PM, leohaas (32.48) wrote:

1) What is the difference between "dumb" money and "smart" money? Who's making those calls?

2) If the consensus is for the S&P to go up, why do you see a correction?

3) Nice graph. But the assumption here is, that we are in a secular bear market. And that if so, the average of the previous 3 secular bear markets is somehow a guidance of where we are going. Who believes that?

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#4) On January 04, 2011 at 5:21 PM, binve (< 20) wrote:

outoffocus,

Hey! I very much agree, the vast majority is seeing only upside

rfaramir,

I too an very bearish on the Dollar long term, but that does not make me bullish on equities. The only thing I am really fundamentally bullish on is Gold because it is a store of value like you point out. There will be very good stock plays and opportunities but I am not bullish on stocks from a nominal or real perspective here.

leohaas,

1) There are a number of different ways to isolate smart money from dumb money, see Guy Lerner's explanation here: http://thetechnicaltakedotcom.blogspot.com/2009/06/investor-sentiment-extemus-maximus.html. There are other indicators as well that professional sentiment surveys account for

2) Because it is not only the consensus. If you read the article, absolutely zero of the investment analyts interviewed had a negative forecast for the S&P. So in this case, everybody is on the same side of the trade. Be fearful when others are greedy springs to mind.

3) My assumption is that we are still in a secular bear market. You don't believe that and that is fine by me. But I think the graph is extremely relevant..

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#5) On January 04, 2011 at 6:02 PM, davejh23 (< 20) wrote:

"FWIW, I am not predicting a crash here. Just a correction."

A significant correction, like we saw this past summer?...or just a small pull-back?  If the average secular bear chart is accurate, it looks like we have about 20% downside here...possibly 2 consecutive years of losses before another rally?...eventually leaving us around S&P 500 (Dow 5000) by 2020?

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#6) On January 04, 2011 at 6:10 PM, outoffocus (23.29) wrote:

Sorry I linked the wrong blog.

Heres the correct link:

http://caps.fool.com/Blogs/a-contest-of-sorts-the/501959 

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#7) On January 04, 2011 at 9:52 PM, rexlove (99.46) wrote:

 

Here's what the chart should look like: 

http://www.google.com/finance?chdnp=1&chdd=1&chds=1&chdv=1&chvs=maximized&chdeh=0&chfdeh=0&chdet=1261170000000&chddm=997050&chls=IntervalBasedLine&q=INDEXDJX:.DJI&ntsp=0

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#8) On January 04, 2011 at 9:53 PM, Starfirenv (< 20) wrote:

B-Man, I know you like charts. Here are some with color and everything.
http://www.marketoracle.co.uk/Article25362.html
Some thoughts-
1. The Bond Market is just fine.
2. The COMEX just cannot default on delivery.
3. China, Russia, India, Brazil, etc. will never come up with a reserve currency to displace the USD.
4. The jobless recovery is for real.
5. VIX is something to rub on your chest.
Usual +1. Best

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#9) On January 04, 2011 at 9:59 PM, simplemts (< 20) wrote:

Rex,

The chart you provided is Nominal, the author used a REAL chart, adjusted for inflation.

 

 

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#10) On January 05, 2011 at 12:17 AM, Option1307 (29.85) wrote:

Nice Binve!

 

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#11) On January 05, 2011 at 12:17 AM, Option1307 (29.85) wrote:

+0.10 for charity! :)

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#12) On January 05, 2011 at 12:38 AM, Momentum21 (82.44) wrote:

binve - there have been some interesting discussions (many hosted by you) about contrarian indicators. From what I have read the retail investor/dumb money has largely not participated in this rally and while money has been flowing out of bonds it hasn't necessarily been moving into equities.

Do you think this actually represents a significant sample of the retail investor?

I lean towards thinking that participation is going to increase significantly as the average American sees some modest improvements around them.   

If anything bullish sentiment seems to be stacking up against commodities right now.  

I am not going to try to tell you that the coast is clear. Based on my battle scars from the past 2 years I am as squeamish as the next bullish fella. I believe that many might underestimate the power of a lack of alternative investments.

Bonds are going, housing is gone, metals are getting pricey and cash is "abundant" and paying a negative return. And EVERYONE is looking for the next dip.

Remember what that man said in the video. "Buy the Dips!" : )

Just my opinion. I always enjoy reading your posts and hope to keep an open mind.  

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#13) On January 05, 2011 at 9:06 AM, binve (< 20) wrote:

davejh23 ,

I think the next correction could take us down to maybe 1120 on the SPX, if it is a sharp correction. But there is no way to tell ahead of time. It is possible that the next intermediate sized wave just corrects sideways through time (like a triangle pattern). But based on the sentiment levels, I think there needs to be a 'cleaning house', and that typically favors a faster correction.

outoffocus,

No problem :)

rexlove,

The secular bear comparison chart was a real (inflation adjusted) chart, not a nominal one.

Starfirenv,

Hey man! Thanks for the link! I have read a few things on marketoracle. It usually does get you thinking. I like your five points (especially #5 :) ). I agree the bond market is fine, because very few people seem to understand it (and in fact I didn't for a long time). That there is a significant difference between USG debt and EZ countries debt. I also agree that the USD is not going away as the reserve currency anytime soon. And while we are currently in a 'jobless recovery' there is no condition on how long the 'recovery' part lasts. Thanks my man!

simplemts,

exactly. Thanks.

Option1307 ,

Thanks Option!

Momentum21 ,

Hey man!

>>Do you think this actually represents a significant sample of the retail investor?

Yes, there are three sentiment surveys that I follow regularly and all are giving similar (but not the same readings). The trends and relative levels are important.

>>I lean towards thinking that participation is going to increase significantly as the average American sees some modest improvements around them. 

I agree. That is why I don't think this is the top and we have at least one more rally to likely higher nominal highs. But as we have seen many times, when the public finally jumps on board, then it is usually near the end of a move. That doesn't necessarily mean it is, but it is certainly time to be careful. The link at the end of the original post are the signals I am looking for, both fundamentally and technically for a more significant top.

>>If anything bullish sentiment seems to be stacking up against commodities right now. 

I agree. A lot of commodities are quite frothy right now. Especially copper.

>> I believe that many might underestimate the power of a lack of alternative investments.

That is a very fair point.

>>Remember what that man said in the video. "Buy the Dips!" : )

That has been the winning strategy so far. :)

Thanks man!..

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#14) On January 05, 2011 at 11:00 AM, leohaas (32.48) wrote:

Thanks for the reference to the "dumb" and "smart" money explanation. If my understanding is right and this indicator is of any value, we are in for a rally.

"And while we are currently in a 'jobless recovery' there is no condition on how long the 'recovery' part lasts."

And while we are currently in a 'jobless recovery' there is no condition on how long the 'jobless' part lasts:
 - US Services Expand at Fastest pace Since 2006
 - ADP: US Companies Added 297,000 Jobs in December
 - WSJ (subscription required): Investor's Forecast: Sunny with Chance of Overheating
 - FED May Keep Easing...
 - US Auto Recovery May Continue...
 - Dollar Rises Most Versus Yen in Three Months...

Boy, do I sound like alstry in reverse?

 

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#15) On January 05, 2011 at 11:07 AM, lorteungen (99.74) wrote:

From the comments section of that website:

"If memory serves me correctly I believe the indicator is calculated by netting the transactions in the first hour of trading and the last hour of trading. The premise is that the smart money transacts in the PM and the dumbmoney transacts in the AM."

Sounds pretty dumb to me. 

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