Todd Salamone: Sentiment suggests only modest pullbacks

The sentiment backdrop continues to suggest that if pullbacks occur, they will be modest.

~ Todd Salamone, "Monday Morning Outlook," September 20, 2014

Todd Salamone on how a "low" VIX does not signal a top

With April expiration now behind us, the CBOE Market Volatility Index (VIX - 15.32) enters the week trading in the 15 area again, which has been a floor since December. Evidently, those seeking protection against a downturn view portfolio insurance as "cheap" when the VIX ventures down into its present area. And with many protective puts expiring this past week, it wouldn't be a major surprise to see index put buyers active in the days ahead. Such activity can be a headwind for equities, as sellers of portfolio insurance hedge by shorting futures.

But the VIX is not as "low" as it appears on the surface. For example, in late December and early February, the SPX's 20-day historical volatility was registering readings of 11.0 and 11.3 when the VIX was trading in the 15-16 area. Right now, SPX 20-day historical volatility is just over 8.4, which would suggest the VIX is relatively high, even as it trades at chart support and may be considered relatively low by most portfolio managers. The bottom line is: Based on SPX historical volatility, the VIX has room to move lower.

~ Todd Salamone, "Putting a 'Cheap' VIX in Historical Context; Despite near-term hurdles, bulls still have the upper hand," Shaeffer's Monday Morning Outlook, April 16, 2011

Todd Salamane dismisses AAII poll as a contrary indicator

One such market [sentiment] indicator is the weekly American Association of Individual Investors (AAII) survey, which for weeks has indicated optimism among retail investors. I have noticed that many market participants are reacting to this survey's bullishness with caution. In fact, we would argue that the intense focus on this survey has kept many would-be investors on the sidelines, as they use this survey as a contrarian signal, missing the market's advance in the process.

The bullish sentiment found in this survey is in major conflict with actual fund flows in the domestic equity fund world, a more robust measure of retail market sentiment. For example, one might anticipate that on the heels of double-digit 2010 gains and a fresh start to a new year, fund flows into domestic equity funds would have been positive. However, in the first week of 2011, fund flows were more negative than they were during any of the first weeks of the prior five years. As a reminder, this period includes 2008-2009, the height of the real estate bust and financial crisis. So, while some avoid the market due to "excessive optimism," there is evidence that fear among this contingent of investors is higher now than during the dreary fundamental and technical backdrop of 2008-2009.

~ Todd Salamane, "Monday Morning Outlook: DJIA 12,000 is Within View,"January 15, 2011

Todd Salamone: Market reaches "acceptance" phase, buy the dip

In monitoring various sentiment-based indicators, it appears that we have entered the "acceptance" phase of the bull market. Acceptance has much to do with acknowledgement of an economic recovery. We find this intriguing, as investor bearishness has been due to the perceived "disconnect" between a weak economy and stock market strength.

For those of you new to sentiment analysis, I'll quickly review the various psychological market phases. There are four stages of investor sentiment as we move from a market bottom to a market top. At the bottom, sentiment is characterized by "despair" and an utter lack of hope ("despair stage"). The initial rally off the bottom is simply not believed ("disbelief stage"). Once the rally has been sufficiently lengthy and has come sufficiently far in price, and evidence of an improving economy becomes incontrovertible, it is finally accepted that we are in a bull market ("acceptance phase"). And, ultimately, there comes the flat-out belief that the bull market will last forever ("euphoria phase").

Below, I list recent headline stories that reflect mounting evidence of a move into the "acceptance" phase of this bull market. For the short term, this sudden emergence of optimism could leave the market vulnerable to a mild correction or range-bound behavior in the weeks ahead. That being said, I would be remiss not to mention that the contrarian approach is most useful when sentiment is counter-trend to market performance; that is, for example, when strong market performance is met with disbelief. Instead, what we are currently seeing is growing optimism within the context of a sharply rising market.

• BusinessWeek April 19, 2010 cover story: "The Hot Hand – Obamanomics Is Working Better Than You Think"
• Newsweek April 19, 2010 cover story: "America's Back! The Remarkable Tale of Our Economic Rebound"
• The Economist April 3, 2010 cover story: "Hope at Last"
• The New York Times April 8, 2010 article: "Why So Glum? Numbers Point to a Recovery"
• The Wall Street Journal April 15, 2010 article: "Evidence Mounts of Strong Recovery"

[...]

A marked pullback should be viewed as a buying opportunity, as buyers of this market have been hedged players who are less likely to panic sell on disappointing news.

~ Todd Salamone, "Dow Conquers 11,000, But Goldman Suit Overshadows Week," Schaeffer's Monday Morning Outlook, April 17, 2010

Todd Salamone on the stock market (2008)

We've entered a black hole.

~ Todd Salamone, Schaeffer's Investment Research, "Reading the Market's Signposts," BusinessWeek, November 20, 2008 (December 8 issue)

Todd Salamone on the Time cover "Surviving the Lean Economy"

And while we are on the subject of the economy, there was yet another cover story this week about it weakening. The May 26 issue of Time hit the newsstands last week with a cover titled, "Surviving the Lean Economy." As we've emphasized, low expectations for the economy hold the key to the stock market decoupling from poor economic data, as the market is in a position to rally on poor data that is not as bad as expected.

~ Todd Salamone, "Watching the CBOE Market Volatility Index for a Direction," Schaeffer's Monday Morning Outlook, May 27, 2008