Friday, December 21, 2018

With Abysmal Investor Sentiment A Market Bottom Might Be Near

Simply noting that the S&P 500 Index is down 12.45% month to date through the close on 12/21/2018, this pretty much sums up the damage inflicted on investors by the market. After a strong start to the year, and following a rewarding 2017, the S&P 500 index had a return of 9.62% through late September. In nearly three short months thereafter, the S&P 500 Index has declined 19.23% from its high, leaving the index down 9.61% for the year through 12/21/2018. This type of market reversal has resulted in investor sentiment turning extremely bearish.

The equity only put call ratio reached 1.13 at Friday's close. Readings above 1.0 represent an extreme bearish reading. The equity market has a tendency to reverse itself when the P/C ratio is above 1.0.

Trading volume on Friday reached a high level last seen in the market pullback in 2011. This high volume level on a down day in the market could signal a capitulation trading day. These capitulation days do not necessarily wash out on a single day; however, it is a sign a market bottom might be near.

The Fear & Greed Index reported by CNN Business is about as low as it can get at '3'. All seven of the components that comprise the Fear/Greed Index calculation are at extreme fear levels.

The NAAIM Exposure Index was reported at 31.96% this week. The NAAIM Exposure Index consists of a weekly survey of NAAIM member firms who are active money managers and provide a number which represents their overall equity exposure at the market close on a specific day of the week, currently Wednesday. Responses are tallied and averaged to provide the average long (or short) position or all NAAIM managers as a group. Institutional money managers have equity allocations at a level approaching those reached during the market pullback experienced in 2015.

Lastly, as this is written, it appears a government shutdown will take place. Charles Schwab notes prior government shutdowns have not had a long lasting negative impact on equity markets as seen below.

This year has been difficult for investors long the market. In a research report I received today it was noted that of 102 Morningstar fund categories, only short term bonds/loans, municipals and one economic sector – utilities – have positive returns this year. We believe recent market action is a correction in a longer-term bull market and continued strong fundamental data will result in a recovery and resumption of this long-term trend, all else being equal, but not without continued market volatility.

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