I find that it is important to watch and see how investors respond to fundamental news. For a company, this would mean a successuful introduction of a key product to an earnings surprise. For the stock market, it would be the bond market, some key economic reports, and further, how prone investors are willing to pick up dips in the market. It is also helpful to find out where the money is moving, particularily the big money like institutions which include mutual funds.
IMO gauging investor sentiment is one of the key ingredients to successful market forcasting, and also realizing that narket sentiment does not change that quickly. In effect, it has its trends too like price and momentum.
Right now, sentiment is definitely improving but can be better. At least it is heading in the right direction now. Also, I see alot of pent up buying interest that wants to see the Dow above 8000. I find that when investors want to see a stock or a major market index like the Dow above a particular value, then it usually will get there even though it may take repeated attempts.
The two market negatives that I can think of right now is that the stock market is not responding as well to the recent bull bond market as I would like it to. Also, I heard that there are individual investors placing taking their money out of mutual funds and putting into the money markets including bonds, which makes sense given how bonds are performing in comparison to stocks. However, this may change when Dow makes it above 8000 successfully.
The markets response to the bond market does concern me. Toward the end of a bull stock market, the stocks stop responding what what happens in the bond market. It is not that they stopped being concerned about interest rates and inflation, but IMO they are moving their money from stocks to bonds which causes this effect. So the two market seperate where at times one goes the opposite direction of the other, with the stocks dropping and the bonds moving up.
The 30 year long bond is currently at its support. If it breaks throuh this support and the stock market does not respond, then we are in trouble. However, I see this as being unlikely, particularily with the improving investor sentiment.
One interesting thing to note. Extreme investor sentiment can be a good contrarian indicator. Back about a couple weeks ago, sentiment appeared to have turned quickly down. This came as a surprise to me. This was when the maket moved down to a support at about 7585 to move up a bit and stall, drifting back and forth, with apparent weakness to upward movement. This was happening during a bond market rally. This is usually not a good sign. I would of like to see the Dow index have a strong bounce since it did move down to the support with increasing velocity and halted at the support, validating it in this fashion. The bond market should of helped to increased investor enthusiasm to pick up the dip in the market. Instead, as if in a collective pessamistic stare, the investor waited to see what would happen next. After a few days passes without their world coming to an end, they started jumping back into the market. In the past, this dip to a strong support would of been met by the bulls buying into the dip which would of afforded a nice bounce.
Meanwhile, the NASDAQ market went down a bit and then immediately picked back up its uptrend. Since the techs appear to leas market direction, this was another signs of pessamistic investor sentiment. This is because I found that when the blue chips stop participating in a market uptrend, this is another sign that the bull market is comng to a close. I suspect this is because investors are either moving out of the market into bonds, or some of the more speculative investors are moving to the smaller cap stocks that have not appreciated along with the bull market.
Just someof my thoughts on the market.
Anyone care to comment?
Bob Graham |
