At Home on the Range
Don't you just LOVE the winter?!
There is some evidence of excessive pessimism out there, which is really quite remarkable given how short the decline has been. For instance, so far this year odd lot short sales have recorded 6 of the top 10 readings since 1970. These are bets placed on a market decline that are executed for fewer than 100 shares at a time and is a contrary indicator (i.e. when they are high, it is normally a good sign for the market). While there is always the possibility that there is something "funny" going on with the data, this reflection of small-trader pessimism has been an excellent buy signal over the past few years.
Likewise, traders in the Rydex family of mutual funds have been more than 5 times more likely to invest in a "safe", low-beta fund at Rydex rather than a "risky", high-beta fund there. This type of risk-aversion was last seen in March 2004.
There is something else intriguing, and that is the pattern of the market itself. Since 1950, there have been 7 other years where the S&P had slipped at least 2% within a 5-day period while still in an uptrend in January, after previously hitting a new 52-week high sometime in the previous 10 days. This could reflect tax-related selling that some are suggesting is the cause for this year's malaise. In those 7 other years, the S&P 500 was higher 30 days later 6 times, with an average return of 3.5% (the lone loss was a meager 0.8%). So if, indeed, tax selling is behind the recent declines, history suggests it should be short-lived and we will soon be taken to new highs.
There is some relatively solid evidence that what we are seeing now is only temporary. However, I'm having a hard time fully buying into that outlook. We saw truly excessive risk-taking in late December, and that type of activity isn't worn off in just a few days.
Looking at a broad gauge of our indicators, whenever we have come off a similar extreme since the bull began in 2003, what we have seen each time is a two-month-long trading range, where the S&P has been trapped within about a 5% range from high to low. I suspect we will see something similar now - breakdowns will not travel too far before buyers step in, and rallies approaching the December highs will have sellers licking their chops. Not advice of course, but I'm looking to rely more on oscillating, overbought/oversold type indicators now as opposed to trying to hop on trend-following strategies.
The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.
Copyright 2011 Minyanville Media, Inc. All Rights Reserved.
Daily Recap Newsletter