US Sector Update: Friday, May 11, 2012

As we've mentioned many times before recently, our Psychology Composite grew increasingly negative as the market soared in late January and early February.  That always alerts us to expect a change in emotions.  In that period early this year, investors were recognizing that all those naysayers of mid-2011 were wrong.  The economic signs (i.e. unemployment insurance claims, etc.) were showing very persistent improvement, and the investors that were still around became much more optimistic. 

At that time, we looked at the statistics that describe the historical "dumb" investors and they were getting more optimistic, and exactly coincident, the stats showing the sentiment of the historically "smart" investors showed that they were starting to reel in their optimism and hedging positions.  This has not affected our long-term bullish strategy, but for the immediate term, we started to emphasize that investors of the day should not expect immediate gratification.  In other words, we needed to rein in the optimism of those newly arrived investors. 

Fast forward three months and you find that the S&P 500 (and many other widely followed indices) continued to move up until the first few days of April.  Mr. Market was pulling their chains - in other words, from that juncture in late January, Mr. Market was "teasing and annoying the newly optimistic investor to see their reaction."  It threw them a bone from late January until the first of April to tease and taunt them into thinking their new optimism should be escalated.  All the while, the smart investor was hedging more. 

Now to the internal correction that our sector studies have been showing for quite some time now.  There are not many better ways to see what is happening internally in the market than by looking at the percentage of stocks trading above their 50 and 200-day moving averages.  Here is the latest chart of that action.

The orange line in the chart above is showing that as of yesterday's close, 35.78% of all stocks in the combined S&P 400 and S&P 500 are trading above their 50-day moving average.  It is also interesting that in April's decline the percentage dropped lower than the level it reached after yesterday's close.  Historically, you can see that in serious declines, like the one in the summer panics of 2010 and 2011, it can go much lower, but any number under 40% can be considered oversold and "corrected." 

Furthermore, here's a breakdown of today's stats by index and sector.

You can see in the tables above that the defensive Utilities and Consumer Staples have moved to the top - not too much different from that period in the corrections of 2010 and 2011.  Again, as we look at individual stocks and sectors, we see that the prices today are once again back to those of late January levels.  It should be noted, however, that they are still substantially higher than in October of last year when smart investors were gobbling up stocks and dumb investors were running scared.  We're warming up, but just evolving into a more aggressive short-term stance. 

Don Hays

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