Newsletter Writers Throw in the Towel

Newsletter writers look like they've thrown in the towel, based on the results
of the latest Investors Intelligence survey. The Bullish Consensus has
reportedly fallen to 31% while the Bearish Consensus has surged to 43%, the
first time in over five years we've seen this survey register a bearish
majority. It came close in June of '06 and August of '07, but this week marks
a definitive 'cross' (a cross referring to bears outnumbering bulls,
historically an unusual occurrence). I recently discussed this setup and
posted the track record in my February 13th column. Note that in 18 out of 20
cases since 1990, the S&P was trading at a higher level three weeks after a
cross.

I'd also note that a Bearish Consensus reading above 40% also has positive
implications from a contrarian perspective, given that this statistic usually
oscillates in the 20-40% range. While it has run up as high as 50% or more, a
reading of 40% or more usually means sellers are at or near an intermediate-
term exhaustion point. The stock market has a strong tendency to bottom out
and begin rallying in the weeks following such an extreme reading. Every
instance since 1980 in which the Investors Intelligence Bearish Consensus rose
above the 40% mark (the buy signal date) is noted below, followed by the date
when the Bearish Consensus fell back into more typical territory (below 35%),
considered the sell date. Note that buying the S&P when sentiment has been
this bearish has proved profitable in 17 out of 18 cases...

Investors Intelligence Bears rise to 40%+
03/14/08 Buy
10/18/02 Buy 884.39...Sell 11/01/02... +1.9%
07/26/02 Buy 852.84...Sell 08/30/02... +7.4%
09/28/01 Buy 1040.94...Sell 10/12/01... +4.9%
04/20/01 Buy 1242.97...Sell 06/01/01... +1.4%
09/04/98 Buy 973.89...Sell 11/20/98... +19.5%
04/11/97 Buy 737.65...Sell 05/16/97... +12.5%
07/26/96 Buy 635.90...Sell 10/18/96... +11.8%
11/03/95 Buy 590.57...Sell 12/08/95... +4.6%
11/19/93 Buy 462.60...Sell 05/12/95... +13.6%
01/22/93 Buy 436.11...Sell 02/12/93... +1.9%
11/29/91 Buy 375.22...Sell 01/10/92... +10.6%
08/10/90 Buy 335.52...Sell 02/22/91... +9.0%
01/26/90 Buy 325.80...Sell 06/15/90... +11.4%
10/30/87 Buy 251.79...Sell 02/24/89... +14.0%
05/25/84 Buy 151.62...Sell 08/10/84... +9.1%
07/10/81 Buy 129.37...Sell 09/10/82... -6.5%
11/07/80 Buy 129.18...Sell 04/03/81... +4.9%
03/14/80 Buy 105.43...Sell 07/11/80... +11.8%

Also on the sentiment front, it's noteworthy that the 10-day moving average of
the CBOE equity put/call ratio closed at .90 Tuesday, only the second time in
history we've seen such a high reading (the other time being February 2003).
On multiple fronts, it's clear that bearish sentiment is running at historic
extremes.

Not a lot to lean on short-term, as the major averages continue to digest
Tuesday's big gain. However, it is noteworthy that over the past two sessions,
we've seen a high-volume rally followed by a low-volume decline. Specifically,
NYSE volume closed over its upper bollinger band during Tuesday's rally, and
hit its lowest level of the past week during Wednesday's decline. Looking back
at times when the S&P staged a similar two-day pattern of rallying on
unusually heavy volume followed by a selloff on low volume, there's a tendency
for the market to trade sideways-to-up the next day. This specific pattern has
occurred a total of 21 times since 1970, only two of which led to an S&P close
down more than 0.3% the next session...

SPX Closes Higher, NYSE Volume Over Upper Band
Next Day S&P Closes Lower on One-Week Low in Volume
03/12/08... S&P500 ??? next session
06/18/07... S&P500 +0.2% next session
04/23/07... S&P500 -0.0% next session
03/20/06... S&P500 -0.6% next session (*)
03/24/03... S&P500 +1.2% next session
12/24/01... S&P500 +0.4% next session
12/20/99... S&P500 +1.1% next session
09/23/96... S&P500 -0.1% next session
12/19/94... S&P500 -0.2% next session
03/21/94... S&P500 +0.1% next session
09/19/89... S&P500 -0.0% next session
06/20/88... S&P500 +1.0% next session
01/26/88... S&P500 -0.1% next session
03/03/86... S&P500 -0.5% next session (*)
11/13/85... S&P500 +1.0% next session
07/30/84... S&P500 +0.3% next session
03/19/84... S&P500 +0.7% next session
06/14/82... S&P500 -0.3% next session
05/07/73... S&P500 +0.7% next session
04/13/72... S&P500 -0.1% next session
02/10/71... S&P500 +0.5% next session
04/30/70... S&P500 -0.1% next session

Categories : Archived EOD Commentary, End-of-Day Commentary

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