Bearish Sentiment And Market Tops

Here's a great article that illustrates how bearish sentiment actually has a historical precedent for calling a market top:

http://seekingalpha.com/article/4010056-dumb-money-investor-sentiment

But What About The Sentiment Readings?

I roll my eyes every time I hear someone saying that this bull market will continue because everyone's so pessimistic.

"But bull markets have never died on pessimism before, so that means we'll still keep going up!" is probably going to be the signature stupid comment that'll characterize this segment of stock market history.

Read Fooled By Randomness. It's that kind of idiotic thinking, that something has never happened before as the justification for it never happening ever, is the reason markets get hit by a truck.

Bull markets don't die on pessimism. Oh yeah? Watch this be the first.

Time To Pull In The Horns?

If history is any guide, there's some rough waters ahead. Precisely because it's been so calm.

The incredibly low volume we've experienced in inverse ETFs is the lowest in 5 years, and whenever it has gotten to these levels, the market has tended to exhibit short term peaks.

Market Hits Extreme Greed Levels

CNN's Fear & Greed Index hits 80. Caution is warranted.

AAPL Failed Right Out The Gate

...and triggered sell-stops galore below $92:

There is a lot of technical damage on the longer term charts too as it breaks below support:

History is usually not kind to those buying the falling knife. It needs to make a better and more firm bottom before the odds tilt in one's favor for an entry.

AAPL - Is Apple Ready To Bounce?

Since the collapse in the price after earnings, shares seem to have a found a temporary floor at $93, with each attempt to bring it lower resulting in a fight back above that line. Here's the bigger picture:

And zoomed in on the past few weeks' price action, we can see that the floor may have been reached in the short term, and is perhaps aiming to make a move back higher:

Now you just have to be careful of a failed breakout.

There It Is

There's that bounce, confirmed by the neckline breakout:

Counter Sentiment Thoughts

I think it's interesting how so many articles I see continually mention how the broad based sentiment indicators are always wrong, that if everyone is bearish, the market must rise. It happens to work a lot.

But just over the past 24 hours, I have seen three articles, all saying there's a rally due to happen now that markets have pulled back. Taking the counter-sentiment standpoint, that makes me uneasy. Just as they like to say when everyone is bearish, be bullish, these writers themselves are now collectively bullish, which is problematic to me. They are all counting on the market bouncing off the 50 day moving average and having that continue on to resume the march back to the highs.

And now that we're seeing the market action this Monday, I'm not seeing that bounce. And when markets don't behave like they're supposed to, that usually doesn't bode well for the short term.

The FOMO Rally

FOMO stands for "Fear Of Missing Out" - this is the rally the market experienced, and it's an odd one.

This move got its start once the market started to think that we weren't going to fall into a recession. And the magnitude of the move very much reflects the kind of move we get after a real recession, not just a perceived one.

Source

Ignoring the moves from the 1930s - I don't believe that's relevant at this stage of our development of the understanding of the economy and how markets work - we're left with 1980, 2003, and 2009 as key plot points for how the market experienced large declines in the first quarter only to be followed by a similarly massive rally.

The difference today vs. back then was that there was a real recession, and profits tanked and so did stocks, but what we have today is a situation where profits really are falling, but... markets are clinging rather stubbornly to the implied support of the Federal Reserve not raising interest rates. The Yellen Call is truly worth noting here, and it's my opinion that the stock market is stretching uncomfortably far from what's warranted by the profit metrics.

But I'm a practical person, and I respect the trends. I'm also of the belief that trend-following models are exacerbating the swings. Upward trends have a ferocity to them as the downtrends, and that's going to lead to a lot of headaches for asset allocation / trading models that are based on pinpoint triggers. Triggers may not be particularly timely when they get hit.

So the Fed kicked the can down the road...

...and left rates unchanged today. They missed an opportunity. The stock market's 10%+ bounce from the lows gave them a free pass and told them the market could absorb another small hike of 0.25%, but they missed it.

That was a nice bounce.

Now what's next?

There's a push and pull happening in the markets. US economic data is helping push things higher, since we're not falling into recession (at least not yet), but international forces are pulling things down, so as long as this push/pull dynamic is in place, I'm expecting markets to trade sideways in a jerky movement.

Lots of Fear

All right. The market has continued to fall another 3% since the last comment. The perfect manifestation of fear is the Gold market. Take a look at GLD. Very overbought on the daily metrics, and starting to get there on weekly metrics. The short term bottom is getting close.

This Market Doesn't Feel Right

It's one thing to buy on the dip... but the major rule that applies to that is that dips should be bought on UPTRENDS. But now we are in a downtrend, dips have smaller bounce potential, and typically rallies are sold into. Which is what we are seeing right now.

There's definitely a sense that markets are not playing according to the old playbook of the past 6 years. China seems to be spiraling lower into economic weakness every month, and US markets just can't shake off that funk.

It's often pointed out that stock markets don't really get into a bear market unless economic indicators go into recession. But the rule doesn't always hold. This one may be that exception to the rule, in that while there may not be a recession YET, there IS a profit margin recession taking place. That might be enough to tip sentiment into bear market territory.

It's problematic when the professionals say, "Yeah, sentiment is bearish, therefore markets are due for a bounce." This line of thinking usually works..in UPTRENDS. There will come a time when market sentiment is right and weakness will lead to further weakness. The primary ingredient for something like that is in place, and that is the DOWNTREND we are in.

Staying small or hedged seems like the best path to take in this environment.

Markets Churning During Earnings Season; Apple Misses

Since the peak of the market's fear on January 20, exhibited by the near-30 level hit by the VXX, which I consider to be max fear or max pain, the market has climbed 5% off intraday lows. For the week, it is currently up 1.27%. The collapse did not get worse despite China's market tanking. Long term trend indicators and momentum are negative, so the only thing going for this market is the oversold condition which can give it some short term strength. Markets operate on a time/price basis: if it can't sell off within a certain amount of time, the next likely move tends to be higher. Markets certainly tend to do that during earnings season.

Apple's (AAPL) earnings disappointed as expected, but the bigger problem is that it missed even lowered expectations, and now, the point at which the market has become saturated may have finally arrived. As of next quarter, iPhone sales are expected to decline for the first time in over a decade. It looks like the market will have to wait for the iPhone 7 before this buzz-driven stock will have any reason to move higher.

Market Fear At Short Term Highs - A Buy Signal?

If you've been around the market long enough, you'll notice a trend: the short term bottoms tend to coincide with the financial pages and websites bringing on talking heads that tend to have a bearish perspective, and mentions of bear markets or market crashes being imminent tend to have a greater frequency.

To back up this observation, I decided to check out Google Trends. Notice how the following terms tend to coincide with short term bottoms in the market:

Search Term: BEAR MARKET

Search Term: STOCK MARKET CRASH

Peaks in these search terms came at the height of the market panic in August 2015, and before that, during the significant market drop of 2011 when the US lost its AAA credit rating, then before that, a very choppy and persistent fear-driven market during the 2008 financial crisis.

Today's search densities are at similarly elevated levels. Contrarians take note.

It's Official: Small Caps Are In A Bear Market

A bear market is defined as a market that has lost at least 20%. As of Friday's close, the Small Cap index is down 20.9%. The high was $125.51 on June 23, 2015, and the close of $99.22 left the index in bear market territory:

Stocks Open 2016 With Worst Losses In History

Risk metrics for the stock market deteriorated considerably in August 2015 as long term moving averages were violated, but snapped back for a furious rally that left a lot of traders and trend-followers whipsawed. But the problem with the S&P 500 was that its recovery and strong movement was largely driven by the FANG stocks (Facebook, Amazon.com, Netflix, Google), so what you had to do to get a clearer picture of market breadth and health was to look at the Equal Weighted S&P 500 index (symbol RSP). That would have made the picture more reliable and would not have subjected you to whipsaw back and forth around the buy/sell point around the moving averages.

In fact, it would have kept you on the sidelines and given you reason to think that the rally was an illusion and was for suckers. The snap back to earth when rallies fail can be breathtaking, and 2016 unfolded with a -9.15% loss for worldwide market indexes and a -7.88% loss for the S&P 500, for the worst start in stock market history.

The Warren Buffett Indicator shows that the market is still overvalued. The profit recession is on the horizon. US manufacturing is contracting.

The only thing holding up the stock market's hope for a rebound is the continued strength in US jobs growth. As of January 17, 2016, numbers were still healthy:


...and with VIX at elevated levels, there's a good chance a short term trading bottom is getting near. The only tricky part, as always, is guessing where the VIX will top out. Picking tops and bottoms is hard; it tends to go farther than people expect:

FINRA Penalizes Big Brokers For Overcharging For Mutual Funds

InvestmentNews reported that some of the biggest brokerages were caught overcharging their customers for mutual fund purchases. The guilty parties were fined for overcharging customers for charitable and retirement accounts. The companies and their fines:

Wells Fargo Advisors paid $15 million
Edward D. Jones & Co. paid $13.5 million
Raymond James Financial Services Inc. paid $8.7 million
LPL Financial paid $6.3 million
Stifel Nicolaus & Company Inc. paid $2.9 million
Janney Montgomery Scott paid $1.2 million

These problems may have been avoided had the industry been held to the Fiduciary Standard. Currently, they are held to the Suitability Standard, and there is a big fight taking place to prevent the higher standard of care of the Fiduciary Standard from taking place. RIAs, Registered Investment Advisers, are held to the Fiduciary Standard and have fewer conflicts of interest than run-of-the-mill brokerage houses.

Check out the rest of the violators and fines paid here.