-- Posted Friday, 3 February 2012 | | Disqus
Equities have continued to rise even though the financial problems of the PIIGS (Portugal, Ireland, Italy, Greece and Spain) remain unresolved. Bullish sentiment readings have reached extremes and investors have positioned themselves for a singular, bullish outcome. While some market observers view high investor bullishness as an indicator that stocks will continue to advance, we believe lopsided sentiment is the Achilles’ heel for markets. In fact, all of the major declines in the past few years were preceded by extremes in bullish investor readings. Figure 1 shows that bulls now outnumber bears by the second largest percentage in the past 4 years. The last time the net percentage of bulls was as high as it is now was coincidentally just before the market topped in May 2011.
Figure 1. American Association of Individual Investors - % Bull Minus % Bears
Sources: American Association of Individual Investors, Continental Capital Advisors
Investors have becoming increasingly bullish as bearish ones have become almost non-existent. Figure 2 shows that there are fewer bears today than at any other time since the beginning of 2007, including at the all-time high of the S&P 500 in October 2007.
Figure 2. American Association of Individual Investors - % of Bearish Investors
Sources: American Association of Individual Investors, Continental Capital Advisors
Investors are also acting on their bullish sentiment. Figure 3 shows that the number of shares short on the NYSE as of 12/31/11 has collapsed since the stock market bottomed in October 2011. Notice that short interest was last this low just prior to the May 2011 peak.
Figure 3. NYSE Short Interest vs SPY Since October 2008
Source: Zero Hedge
Despite high levels of optimism and lopsided investor positioning, investor participation has been declining. Figure 4 below shows that overall trading volume has declined for the past 4 years. Market technicians generally view rising prices favorably when accompanied by rising volumes. Thus, rising stock prices on declining volumes calls into question the durability of the recent market rally as well as the entire rally since the March 2009 bottom.
Figure 4. 50-Day Moving Average Of US Exchange-Listed Stocks
The four-month rally that started at the October 2011 interim low has led to a surge in investor bullishness and positioning, which when combined with insurmountable sovereign debt problems, sets the backdrop for a major decline in equities.
Daniel Aaronson - daaronson@continentalca.com
Lee Markowitz - lmarkowitz@continentalca.com
http://www.continentalca.com
Continental Capital Advisors, LLC
Continental Capital Advisors, LLC was formed to offset the destruction of wealth caused by the global devaluation of currencies by central banks. The name Continental Capital symbolizes the 1775 US Currency, "the Continental", which was backed by nothing and quickly became devalued.
Disclaimer: The above is a matter of opinion and is not intended as investment advice. Comments within the text should not be construed as specific recommendations to buy or sell securities. Individuals should consult with their broker and personal financial advisors before engaging in any trading activities. Certain statements included herein may constitute "forward-looking statements" within the meaning of certain securities legislative measures. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results, performance or achievements of the above mentioned companies, and / or industry results, to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. Any action taken as a result of reading this is solely the responsibility of the reader.
-- Posted Friday, 3 February 2012 | Digg This Article
| Source: GoldSeek.com
