Monday, January 23, 2006

AFTER THE FALL:

Despite the volatile slide of last week, with the options markets recording the most volume ever in over 30 years, both Thursday and again on Friday, Sentiment Indicators seem quite benign; partly because some, like the Surveys which are reported on Wednesday, are a bit behind.
They did prove helpful, however, in predicting the toppiness the last 2 or 3 weeks! Ignoring reasons for the crashette that the talking heads explain away to answer-seekers - Iran's nuclear scare, earnings and projection disappointments, rising oil and gold, etc., I would posit that the main culprits for this shakeout were the above-mentioned option expiration on the 3rd Friday, some repositioning and profit-taking by hedge funds ( their net long position has been in the top 2% of the '00-'06 period); we've also bounced down off the seemingly impenetrable 11,000 Dow 30 level for the 5th time since '00 - on failed rallies almost every year.
The foremost reason was, of course, the recent high complacency exhibited by several Sentiment Indicators, such as Bullish Percent (in the low 70s), Nasdaq to NYSE Volume, the Panic/Euphoria Index, I.I. and Market Vane Bulls at 60 and 73 respectively, with the AAII close behind at 59, and lastly the McClellan Oscillator (ratio-adjusted) and Summation both at toppy levels.
As I began the column, not much has changed other than coming off the highs - possibly next week may give a better outlook: the VIX jumped to 14 from 11, the McClellan Osc. went negative to -13, and Public to Specialist shorts dropped materially, but not dramatically.
Finally, I do worry about the massive bullishness on oil stocks ( the next Bubble?), at least short term - the next victim to be taken out and shot.

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