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Market Warning Signs

Posted by Larry Doyle on January 24, 2014 9:58 AM |

When everybody is on one side of a ship that vessel will tend to list and often has a hard time continuing to move in the same direction.

This navigating analogy is used very often on Wall Street and strikes me as very applicable a mere three weeks into trading for calendar 2014. Let’s get more specific in terms of what exactly I mean.

Sentiment indicators on Wall Street are defined as,

A graphical or numerical indicator designed to show how a group feels about the market, business environment or other factor. Sentiment indicators can be used by investors to see how optimistic or pessimistic people are to current market conditions.

Not surprisingly after a major market move higher as experienced in 2013, many investors are feeling much more comfortable about wading into the water, that being the market. Are too many people feeling too comfortable and might the tide move out leaving people feeling overly exposed? I believe so.

Not that bullish sentiment cannot trend higher or merely correct by having the market tread water, that is move sideways, but as many prognosticators have highlighted the overall bullish sentiment coming into this year is in the vicinity of 80%. Again, with so many people on one side of the ship, the ship may start to bob and weave if not actually take on some water. I believe we are seeing exactly this kind of price action in the market over the course of the last few weeks.

What is causing our ship, that is our market, to list? Concerns about economic slowdown within emerging markets, specifically China. Concerns within the European banking system, specifically a surprise announcement by Deutsche Bank of a billion-plus Euro loss. Our domestic economy has fits and starts but remains fragile and the Fed seems focused on lessening the spike in the punch bowl by tapering its quantitative easing program. Add it all up and no surprise that our equity market is retreating somewhat.

For those with an even keener interest in this topic and wondering why there is such a massive disconnect between bullishness on Wall Street and general consumer concerns on Main Street, I highly recommend you review Figure 17 in this attached chart from Yardeni Research: Stock Market Research: Fundamental, Sentiment, and Technical. This chart highlights the bullishness within our equity market as measured by a Bull/Bear Ratio overlapped against a chart of Consumer Confidence.

If a picture, in this case a chart, paints a thousand words, then Figure 17 encompasses a volume of works within a financial library. Well worth a look and then navigate accordingly.

Larry Doyle

Please order a copy of my book, In Bed with Wall Street: The Conspiracy Crippling Our Global Economy.

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The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

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