Saturday, October 17, 2009

The Market's Psychological Map

We are at an interesting point on the map of our feelings on the economy and markets. Stock market sentiment is not all that giddy with the rally still not getting that much respect. Fund managers have been holding their nose and dipping their buckets into the stream because their benchmarks are leaving them looking like fools. Buying just because everyone else is tends to happen closer to an abrupt end to a move than to a surprise beginning.

It is the consumer's sentiment that I want to take a look at:

This chart tabulates, not the raw sentiment numbers, but preceding 6 month change in sentiment over the years. As you can see, we are now at a fast 6 month rate of improvement not seen for 15 years. And the only other two times in the past 20 years this was seen was a big turn point in sentiment back down.

An interesting comparison can be seen comparing our current recession to the previous one. The fast run-up to the turn level happens at the end of the recession, as you might expect. But then you had a debt hangover induced stock market and sentiment dive to the mid-to-late 2002 market lows after we had celebrated the end of the recession. We're seeing the same pattern played out with the latest recession, which most are saying ended mid year. We have ballooned our debt to way higher, more unstable levels since the 2002 episode. If the pattern repeats, we are at a point where we soon have a psychology turn and some kind of debt hangover induced stock market trouble. This could be commercial real estate loans, a dollar debacle. It could be a variety of things.

I have been a market bull since April despite many bear signals, some of which I've summarized here while concluding that I favor turns north from consolidations (based mostly on technicals). But now the technicals are starting to suggest a turn back down. Those who follow fibonacci curves point to the typical 50% retracement level that happens after big moves. That comes to 1100-1200 on the S&P 500. The ETF Profit Strategy Newsletter called the start of the rally with a March 2 alert for a move by the Dow to the 9000-10000 area. They are now seeing a big move down. Doug Kass started going long in February a few weeks early and called the tippy top bottom of the crazy gyrations on TV within a week of the event. He has been going short for weeks and is now at his highest net short position since February. I am going from bull to neutral until we sneak past this twilight zone.

If we are to have some debt overhang induced market trouble, our emotional state would suggest it may start soon. The consumer confidence survey level is over that unstable 70 mark:

If we are considering our emotional state, we may want to take a read on what the web bots are seeing. A misconception about bots is that they predict big events on particular dates. But with the markets, the software actually reads feeling changes and, I suppose, puts together some kind of centroid of all it reads for a time approximation. George Ure and Clif High are the "two guys in a hole in the woods in Oregon" creating what they call "The Web Bot Project". In commenting on the bots' recent prediction about October 25 (see my previous post "Web Bot Weirdness") George Ure says this at his site
"What is October 25th? The way the data reads, we are less likely to see a single event driving things (although that's possible) so much as we are expecting an emotional tipping point. So, for example, the kinds of news events that might feature the beginnings of a showdown between 'the people' on the one hand versus 'the banksters' on the other. The forces have been building there..."

It will be interesting to see how our feelings might change going into November. If the seers who have been calling things to a tee lately are right again, we are all going to get a little cranky. Even Larry Kudlow, the irrepressible CNBC optimist and bull, has lately started sounding more like Peter Schiff, lashing out at those who are debasing the dollar and drowning our prosperity in a sea of debt and federal meddling. Lynch the banksters!

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