The Dow managed to avoid 7 straight weeks of declines on Friday but just by the skin of its teeth. Rising 30bps, about the amount it needed to stay in the positive for the week, most of the “rally” came on hopes of a weekend bailout package for Greece—something similar to a European version of the Lehman weekend we all experienced back in October of 2008. Unfortunately, investors didn’t get their wish and the futures look ugly this morning.
Most readers know we aren’t big proponents of technical analysis and even less convinced Greece is meaningful but in a time where investors throw out fundamentals based on macro fears, we do concede that technicals have a role, if only for the reason that people do look at them. So we decided to take our own look at some of the more popular indicators to get an updated idea of sentiment and where it might be pointing in terms of where the markets might be heading over the next few months, regardless of what the fundamentals may be.
Ok, this is a lot of data and its’ not clear to the casual observer what to make of it. We have two takeaways. First, the trend is consistently down—i.e. negative. So anyone who tells you there is too much bullishness in this market is probably full of it himself. Secondly, the most reliable indicator we have back tested, the CBOE Equity Put/Call ratio, is getting close to its high from October of 2008 (extremely bearish), when the world was thought to be falling apart, and coincidentally, right now sits just atop of where it was on March 2009, the market’s bottom.
Reading this data, our sense is that we are getting close to a bottom on investor sentiment. Since 2008 we have had over 10 5% pullbacks, a record and one which is based on still fresh memories of 2008. Now, bottoming sentiment doesn’t necessarily mean that stocks will rebound but it’s a good clue that they probably will stop going down. Then, given the huge short interest ratio, if we are correct in our assumption that economic data will come in higher than expected in the third and fourth quarter and pairing it with the bottoms up fundamental data we keep hearing from our companies (beating estimates, raising forecasts) and valuations, we may have a recipe for a decent rally in stocks by year end.
We hope everyone had a great Father’s Day
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