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II Insight 

Dec 2010

Global leaders in Technical Analysis since 1947

  
    
    

 

Welcome to the December edition of II Insight.

 

  

In last month's report we were cautious and anticipating a correction. Subsequent trading in November saw the markets perform the much needed correction, a move that retraced a Fibonacci 23.6% retracement of the September and October rally on both the S&P 500 and the NASDAQ 100. Not that deep but it was sufficient enough to take the boil off our indicators. We piled back into equities over the last two weeks of November, just ahead of the market reasserting. The Coe Report portfolio for instance moved rapidly from net short mid month to a 110% net long last week.

 

However, 2010 has been all about switching between “risk-on” and “risk-off” and that looks set to continue going into 2011. The technicals are now implying a shift back to the latter. Two key reasons for caution are highlighted in this report. Of course, over the short-term, seasonality now favors the upside. The final five trading days of the year historically generate a Santa's rally, so the hangover, as it often does, may not rear its ugly head until January.

 

We wish all our readers, their family and friends, a happy Christmas and prosperous New Year.

 

 

 

Tarquin Coe, Market Technician

www.investorsintelligence.com

 

    
    
    
    
    

Chart of the Month – the bull bear spread 

 

The Investors Intelligence Advisors Sentiment Survey bull-bear spread is once again moving towards the +40% danger zone. When the spread last broke above 40%, in October 2007, the market collapsed spectacularly.

 

The table below shows the outcome, in terms of duration and degree of correction, for all previous instances over the last ten years when the bull bear spread exceeded +40%. The bull bear spread is simply the percentage of bullish advisors minus the percentage of bearish advisors.

 

 

Period when spread = +40%

Length of consolidation

Scope of correction

Mid 2003

1.5 weeks

-5%

Early 2004

6 months

-9%

Early 2005

4 months

-8%

October 2007

17 months

-58%

 

 

In our most recent survey, at the end of November, the bulls minus bears ratio maintained its uptrend off its September low and read +33.6%. Readings going into the start of the New Year are worth paying attention to, as a move into the forties would be a strong call for defensive measures.

 

 

The Advisors Sentiment Survey  is available on its own or as part of the US Market Timing Service. The survey's results are published every Wednesday before the open.

    
    

Indexes – S&P 500 nears critical juncture

 

In harmony with the ominous potential from our Advisors Sentiment survey is the fact that the S&P 500 is approaching a major hurdle. A Fibonacci 61.8% retracement of the October 2007 through March 2009 low, stands at 1228.7, and that could present significant resistance to the current advance.

 

In our portfolios we bought the market quite heavily on the recent November pull-back but we are now locking in those profits and are reluctant to chase too many new longs at current levels. That's our strategy for equities, at least until sentiment has cooled off and the S&P 500 has clearly broken through the ceiling of resistance. Tests of major Fib levels are never perfect, so we would want to see the index break beyond 1250 before touting the “risk-on” trade again.

 

 

The above chart was taken from the December 6th Coe Report. A year's subscription costs just $349. Take out a subscription today to avoid the price hike in January.
    
    
    

The view from London

Over in the United Kingdom office, we certainly keep a close eye on the Advisors Sentiment report, and it's interesting to see the same view reflected both in the feedback that we get from subscribers and from broker research and other media.

The concensus for the near-to-medium term certainly favours equities. I was recently invited to participate in the Barclays Capital survey of their clients. This survey, which took in the view of over 2,000 professional investors, brokers etc also showed a high degree of confidence - Here's a quick overview:

  • 37% of respondents favoured the equities markets for the best performance in 2011 (34% went for commodities)
  • And amongst the equity asset class, emerging markets came out top
  • A sustained period of sub-trend growth is the favoured forecast for the US
  • From a risk perspective, the Eurozone was seen as the most likely source of trouble, followed by a slowdown in Chinese growth
  • In the world of rates and bonds, the respondants thought hikes would be unlikely in 2011  

So that's the concensus. Now let's see what will actually happen! 

By the way - one sure bet for 2011 is the increase in VAT over here in the UK. Our government is hiking this sales tax to a painful 20%. I guess we can't complain too much, after all we got to bail out the public sector somehow!  Anyway, a simple way for UK investors to save a few pounds is to renew ahead of the January 4th deadline. Subscription manager Sarah Barnes will soon be sending out an email with the details.

 

Finally, I'd like to wish all our readers a happy Christmas and a good New Year. We will be keeping a reduced schedule over the Christmas - New Year period, but we will be producing some longer term reviews and outlooks in our UK, FX, Commo and Index reports.  

 

Mark Glowrey

    
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US Sentiment holds the key
The Advisors Sentiment Survey continues to provide advance warning of major market turning points.  
The analysis and data regularly feature in the international financial press as a key indicator of market reversion.
Examples of these articles can be found on Barrons, NY Times, and Investor's Business Daily.
Read what CNBC said about the biggest switch in sentiment for 7 years.
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Historic Advisors’ Sentiment data since 1963 is also available; please contact us for further details.

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