Market Sentiment & Internals (Excerpt)

Market Sentiment & Internals (graphics courtesy of Yardeni.com, Sentimentrader.com & Stockcharts.com)

The segment begins with a review of 'smart vs. dumb' money, optimism/pessimism extremes and the risk profiles of several markets.Then...

Investors Intelligence data continue to show that market newsletter writers were recoiled from their previously bullish surge with the question being will we get a leg down to plant them firmly in the bear camp or not? The view here is neutral as with others in this segment.

Let’s look at our friends in the AAII and then move on to some internals. This group has doggedly refused to get over bullish in tow with a stock market that is near its highs and in a firmly established uptrend. 

Below is a chart I created so that we can once again review some history at work here. One of our operating theories is that the stock market bull may not end until the AAII membership closes the loop on the bizarre goings on of about a decade and a half ago.

AAII was soundly punished for its manic over bullish stance during the run up to the 2000 top that became absolutely lunatic over bullish during the 1^st year of the cyclical bear that followed! 

AAII then bought the bear market bottom in 2003 and proceeded to doubt Greenspan’s inflated bull, reducing exposure consistently throughout the bull. Additionally, they were in good shape when the 2008 crash came about and they even bought its aftermath, although interest has clearly waned in the stock market since 2006. All in all, a good job by AAII after the 1996-2002 humiliation. 

The question is, have the AAII become permanently smart like you and me (good one; the market is an equal opportunity humiliation provider). I can’t speak for you, but I need tools (like a caveman). I continue to wonder whether this one dysfunctional indicator needs to be put back in order before THE top.

A look at some seasonals shows that October tends to keep the pressure on mid-late month before ending with a relief valve opening. That lasts into early November, when the market apparently has second thoughts and decides to test its bull activity before a nice, generally bullish Santa season comes about. Now, if only it were as easy as that (and we’ve got a pretty disturbing presidential election tucked in there to boot!). 

The segment then finished up with more market internals to wrap things up.