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A Contrary Review


Mixed measures...just what I like to see!


Over the past few days, I've been asked to update several of the contrary guides I've highlighted in the past that help us to judge where the risk might be in equities.

The last time I went over them was last November, at which time they suggested the biggest risk was for short-sellers, as these guides were suggesting we'd be seeing higher equity prices in the weeks ahead.
Let's refresh our look and see how things look now:
The equity-only put/call ratio has been drifting around lately, and hasn't really been showing any kind of trend. It approached the "too-bullish" end of its range earlier this year, but never quite became extreme enough to suggest that traders were excessively optimistic. The current readings don't give us much of a clue one way or the other.
The SPY Liquidity Premium, that looks at the volume in the S&P 500 exchange-traded fund in comparison to the volume in the underlying equities, is in a similar position. By late November and through January, we saw SPY volume remain low relative to its components, but again it never quite hit a level that would suggest things were hitting an extreme. It has since backed off, and like the put/call ratio isn't giving us much help here.
Assets in the Rydex leveraged bear funds are also about in the middle of their range over the past couple of years (do we see a pattern here?). The traders of these funds have changed over the years, and they have become more willing to fade market moves rather than try to exploit market trends, but still this big-picture view can be valuable. We saw that late last year assets in the bear funds dropped to a very low level (relative to the past couple of years), but since then have risen despite the overall positive market.
Odd lot short sales is another indicator that has changed over the years, as we see continually more volume here due to several factors (not just sentiment-related). Still, the indicator can be useful when it hits one extreme or another, but again we see that lately these traders have been neither pressing hard on their shorts nor lightening up to an extreme degree.
Overall, none of the four indicators is currently at an extreme, and haven't been for some time. In fact, we've seen the unusual situation of bullishness backing off in spite of rising equities prices. I've noted before that this is typically not a good sign longer-term (despite the "wall of worry" theory), but in the short-term we can't decisively side with Hoofy or Boo.
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