Technical talk: Sentiment review
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April 10th, 2009 by Prieur du Plessis, Investment Postcards from Cape Town
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The comments below were provided by Kevin Lane of Fusion IQ.
Secular liquidity, a.k.a. buying power, as seen through the eyes of current individual investor allocations relative to historical norms, shows ample liquidity on the sidelines and in cash. Current levels approximate liquidity seen at the 1990 and 2002 lows, which continues to suggest that there is probably enough liquidity to keep moving stocks higher in this snapback/bounce.
When combined with incredibly negative investor expectations, no alternative for return in fixed income, and the principles of mean reversion at work and moving higher with some volatility, pullbacks (possible retest of lows) and consolidation are a reasonable expectation still. Remember, continue to watch how stocks act on bad news. When they rally on bad news, not only does it suggest investors are looking over the valley, but it also suggests liquidity is more than sufficient to absorb the selling.
Granted, after a 25% rally off the lows and stiff resistance in front of us near 850 (S&P 500), it won’t be an easy climb. The reason it is never an easy climb off the lows is because at every level higher on an index, pockets of under-water investors (i.e. losing money positions) can sell at break-even prices. Nonetheless these indicators suggest we can move higher over time. We will continue to monitor for changes that would suggest this argument no longer holds true.
Shorter-term sentiment measures such as Put/Call ratios and AAII Bearish Sentiment Survey, which were decidedly bullish for the market several weeks ago via their bearish readings, have moderated but are not yet at levels that would be construed as a negative.
Click on the graphs for larger images.
Source: Kevin Lane, Fusion IQ, April 9, 2009.
Dr. Prieur du Plessis is an investment professional with 26 years' experience in investment research and portfolio management. More than 1,200 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns, including his blog, Investment Postcards from Cape Town. He has also published a book, Financial Basics: Investment. Prieur is Chairman and principal shareholder of South African-based Plexus Asset Management, which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and a number of foreign countries. He also serves as Honorary Consul of Slovenia for South Africa, actively developing economic, cultural and scientific relations between Slovenia and South Africa. Prieur is 54 years old and live with his wife, television producer and presenter Isabel Verwey, and two children in Cape Town, South Africa. His leisure activities include long-distance running, traveling, reading, motor-cycling and scripophily. Read more from the author/contributor here.
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