Institutional Investors Remain Better Buyers in the Face of Extreme Negative Sentiment

TICKscore settled at +2 Friday, the third consecutive session with positive
NYSE TICK action. Institutional investors have been consistently better buyers
for the first time since May. Cumulative TICK settled at +25,000. Note that we
saw a pair of 80,000+ readings on Wednesday and Thursday, which should help
the 20-day moving average maintain its recent uptrend.

Currently the S&P is trading fifteen points above last Thursday’s settlement
when advancing issues outnumbered declining issues by more than a 3:1 margin.
If that gain can hold heading into Monday’s close, it would have positive
implications for the intermediate-term. The last thirty times this pattern has
occurred are noted in the table below, beginning with the date of the 3:1
breadth session and the date three sessions later when the S&P closed higher.
Note that in 25 out of 30 cases, or 83% of the time, the S&P was higher two
weeks later. That’s significantly better than the 57% at-any-time odds for a
higher S&P two weeks later. For this setup to be triggered Monday, the S&P
merely needs to hold above 1245.

S&P500 Higher Three Days After 3:1 Positive Breadth
04/16/08-04/21/08 S&P up… S&P +1.4% two weeks later
04/01/08-04/04/08 S&P up… S&P +1.5% two weeks later
03/18/08-03/24/08 S&P up… S&P +1.7% two weeks later
01/28/08-01/31/08 S&P up… S&P -2.2% two weeks later
11/28/07-12/03/07 S&P up… S&P -1.8% two weeks later
11/23/07-11/28/07 S&P up… S&P +1.2% two weeks later
10/05/07-10/10/07 S&P up… S&P -3.0% two weeks later
09/18/07-09/21/07 S&P up… S&P +2.1% two weeks later
08/31/07-09/06/07 S&P up… S&P +2.7% two weeks later
08/29/07-09/04/07 S&P up… S&P +2.0% two weeks later
08/22/07-08/27/07 S&P up… S&P +0.3% two weeks later
08/17/07-08/22/07 S&P up… S&P +1.0% two weeks later
07/02/07-07/06/07 S&P up… S&P +0.2% two weeks later
06/27/07-07/02/07 S&P up… S&P +2.0% two weeks later
06/13/07-06/18/07 S&P up… S&P -0.8% two weeks later
05/11/07-05/16/07 S&P up… S&P +1.1% two weeks later
05/02/07-05/07/07 S&P up… S&P +1.0% two weeks later
04/20/07-04/25/07 S&P up… S&P +1.1% two weeks later
03/21/07-03/26/07 S&P up… S&P +0.8% two weeks later
03/19/07-03/22/07 S&P up… S&P +0.6% two weeks later
03/06/07-03/09/07 S&P up… S&P +2.4% two weeks later
11/29/06-12/04/06 S&P up… S&P +0.9% two weeks later
10/12/06-10/17/06 S&P up… S&P +1.0% two weeks later
10/04/06-10/09/06 S&P up… S&P +2.0% two weeks later
09/12/06-09/15/06 S&P up… S&P +1.2% two weeks later
08/15/06-08/18/06 S&P up… S&P +0.7% two weeks later
07/24/06-07/27/06 S&P up… S&P +0.7% two weeks later
07/19/06-07/24/06 S&P up… S&P +0.8% two weeks later
04/18/06-04/21/06 S&P up… S&P +1.1% two weeks later
01/03/06-01/06/06 S&P up… S&P -1.7% two weeks later

Sentiment surveys continue to indicate excessive levels of pessimism across
the board. The latest Investors Intelligence survey registered 49% bears, the
highest percentage of bearish newsletter writers since 1994. This keeps alive
the bullish signal triggered back in early July (see my July 6th column), and
from the looks of things it will remain in effect for some time. We need to
see a reading back under 35% to close out that signal.

Also noteworthy that the latest AAII survey of small investors registered a
high level of bears (58%), generally a positive sign from a contrarian
perspective. This past week marked the sixth consecutive week that the AAII
survey has registered more bears than bulls. Historically, four consecutive
weeks with a bearish majority means the market has already sold off hard,
illustrating how small investors tend to react to, rather than anticipate
market moves. By the time they turn this persistently bearish, the selloff is
usually just about over. The stock market typically bottoms out and rallies
over the next few weeks, ultimately eroding the excessively pessimistic
sentiment. Every case of four consecutive weeks with more bears than bulls on
the AAII survey is noted in the table below. There have been 23 separate
occurrences since our database began in 1987. Note that in only two cases was
the S&P meaningfully lower three weeks later, and that the latest signal
triggered July 3rd remains in effect until the end of this week…

AAII Bears Over Bulls Four Consecutive Weeks
07/03/08… S&P500 ??? three weeks later
01/11/08… S&P500 -0.4% three weeks later
11/30/07… S&P500 +0.2% three weeks later
09/07/07… S&P500 +5.0% three weeks later
06/15/07… S&P500 -0.2% three weeks later
06/09/06… S&P500 +1.4% three weeks later
01/24/03… S&P500 -3.1% three weeks later (*)
10/11/02… S&P500 +7.9% three weeks later
07/19/02… S&P500 +7.2% three weeks later
06/14/02… S&P500 -1.8% three weeks later (*)
10/23/98… S&P500 +5.1% three weeks later
09/04/98… S&P500 +7.3% three weeks later
09/20/96… S&P500 +2.0% three weeks later
03/31/94… S&P500 +0.4% three weeks later
10/01/93… S&P500 +0.4% three weeks later
07/02/93… S&P500 +0.3% three weeks later
05/07/93… S&P500 +1.8% three weeks later
08/21/92… S&P500 +1.1% three weeks later
02/01/91… S&P500 +6.6% three weeks later
08/24/90… S&P500 +1.7% three weeks later
02/16/90… S&P500 +1.6% three weeks later
12/01/89… S&P500 -0.9% three weeks later
03/23/89… S&P500 +4.3% three weeks later
12/09/88… S&P500 +0.3% three weeks later

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

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