Saturday, June 20, 2009

Sentiment and the Bear Market Resumption

I have heard a lot of talk in cyberspace regarding the degree of pessimism and bearishness being a contrary indicator. When you come to a site like this, you're going to get an earful of bearish talk right now. But are people too bearish at this stage of the ongoing bear market?

Instead of anecdotal claims of excessive bearishness and looking at comments on chat boards, why don't we look at the actual data? Let's see if the standard sentiment indicators support my thesis that the next bear leg down in the general stock markets has already begun. First up, The Investors Intelligence Percentage Bears chart, courtesy of (i.e. I stole this from) Market Harmonics:

Next up, a 2.5 year chart of the 8 and 20 day moving averages (smooths out the high daily volatility that makes a daily plot tough to look at) for the CBOE options total put/call ratio:

Following are charts of the bullish percentage in the New York Stock Exchange ($NYSE) and the percentage of stocks above their 200 day moving average ($NYA200R) to add some technical data to the sentiment data:

I think we've seen plenty of optimism and we are already past the peak. Reality ain't pretty in the economy we live in and people can only suspend the truth for so long.

Other supporting evidence for resumption of the bear market:

* We've already made it to the 200 day moving average on the major market indices.
* The weaker, leading sectors for this bear market peaked over a month ago and are already heading down (banks, home builders, financials).
* We have entered a seasonally weak period for stocks.
* We have an insanely low Volatility Index (VIX) that has been in a bear market trend for 7 months.
* The fundamentals are getting worse and worse in the real economy underpinning stocks and global trade has fallen off a cliff at a time when the current "raw" S&P 500 PE ratio is over 100!
* We've already rallied roughly 38% in the major indices since the March low - higher in percentage terms than most of the rallies during the worst bear market of the past century (i.e. 1929-1932).

My judgement on the general markets colors my judgement on Gold stocks, which are not immune from a general equity sell-off. This is why I'm not in a rush to buy more Gold stocks here. I already know a better opportunity is coming.

In the setting of a nasty bear market, Gold stocks can go lower or fail to make significant new highs even if the Gold price goes to new highs! I actually expect Gold stocks to rally here as no correction moves in a straight line and a double top is even possible, but the lows for the year in Gold stocks are not here yet - not even close. Patience will be rewarded, as cash is an OK position right now despite all the calls for an imminent dollar collapse and/or devaluation (that comes later...).

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