What does that mean when sentiment indicators are hitting 5+ year highs? Well in the past, these sentiment indicators are reverse indications and have in the past marked market tops. Remember, Smart Money makes money by making as many people as possible wrong at any one time.
Here are some interesting charts regarding sentiment.
Note when sentiment gets to extremes marked in red, we are at short or longer term tops, when sentiment is negative, we are at short/long term bottoms.
Above is the Smart Money/ Dumb Money Confidence Index, you can see a similar effect here when smart money is compared to dumb money. In essence, dumb money has low confidence in the market right before the market rallies, they are basically following the market, whereas smart money, is almost the exact opposite. Note the current position of both smart/dumb money as they diverge from each other.
Again, the commercial hedge is at extreme low levels, and right now exactly the same (see blue horizontal line) as the tech bubble implosion and recently made even lower lows.
How Smart is the Fed?
Neel Kashkari in a Op-Ed article in the Washington Post, admits the following as he master-minded the creation of TARP as the world seemed to be falling apart,
"Seven hundred billion was a number out of the air,” Kashkari recalls….”It was a political calculus. I said, ‘We don’t know how much is enough. We need as much as we can get [from Congress]. What about a trillion?’ ‘No way,’ Hank shook his head. I said, ‘Okay, what about 700 billion?’ We didn’t know if it would work. We had to project confidence, hold up the world. We couldn’t admit how scared we were, or how uncertain.”
The above admission from the creator of TARP during the financial crisis, shows that these guy at the Treasury and the Fed are in uncharted waters and really had no idea what needed to be done, they were taking shot in the dark. So when you see Bernanke on 60-Minutes say he is 100% certain he can control inflation (which the Fed is trying to create at the Fed's norm of 2%) you have to really be skeptical of such claims. They are trying to project confidence and and air of “We have it under control”, however, in recent weeks and months the Fed has had to downwardly revise many of their assumptions regarding deficits, job growth, and GDP targets. More or less what was sold as “Certainty” is really once again, just a shot in the dark. A healthy dose of skepticism and a little paranoia is a health thing for an investor/trader.
In some other interesting news, Julian Assange of Wikileaks fame, is preparing for a US indictment under the US Espionage Act, which is interesting on several different levels-one he's not an American citizen. The Us knew months ahead of time that these diplomatic cables were going to be released, in summary of the US action/intervention to head off these leaks, the US government did virtually nothing. However, when it became clear that the next leak would be about a major US bank (and Assange gave an interview months back to a computer magazine saying he had material on Bank of America, all of the sudden everything jumps into high gear. He's put on the most wanted page of Interpol for “Sabotage of a condom?”-think about that, an internationally most wanted person for sabotage of a condom. Then a concerted effort to shut down all avenues of Wikileaks hosting services, now a Espionage indictment. Common sense says that Wikileaks is most likely not going to release material that is “anti-climatic”, it must be bigger and far more serious then the quarter of a million diplomatic cables that the US government knew about for a log time and effectively did nothing at all. Oh, and as the indictment against Assange is released, guess what bank rallies and breaks the Trend Channel downtrend? Yep, BAC, I warned to close the position the day before as it was looking like it was ready to make a move and it did. Like I said above -skepticism and a little paranoia is reasonable for market participants. Now if we can just get that file released, we could see a real profitable move in BAC/Financials, just not up.
GAP-meltdown
I believe the news on GAP is that they are going into bankruptcy. Food prices are on the rise, US data shows food and gasoline getting more expensive and with certain agricultural commodities getting very expensive as we talked about a moth or so ago, I'm betting that Grocery stores which have one of the lowest profit margins of any industry are seeing those margins squeezed badly.
Some others in the same industry group are potentially setting up great short sales.
SWY daily-my long MACD looks horrible, volume is picking up on downside moves as well, this is in good position, but it may offer a better entry, it's on the radar this week.
The hourly 3C chart, it may rally a bit giving a good R:R ratio
CBD Daily, long MACD
As for China's feared rate hike over the weekend, China’s said they will fight inflation in 2011 by raising bank reserve ratios, however, they refrained from increase the interest rates, a move which many investors believe would halt economic recovery. Asian markets are trading higher tonight on the move.
DOW Futures have been down overnight in screen trade as much as 19 points, pretty much all last week futures overnight were higher in overnight screen trade, this is a pretty big difference.
The ARM's Index which compares up volume with up issues is now the most divergent it has been since 1956. Another Sentiment Indicator, the Rydex Bull/Bear Ratio is now the highest since the collapse of the tech bubble.
The Euro opened the week tonight with a gap down, it's close to making a new low and confirming the downtrend in the EUR and uptrend in the dollar, again, generally speaking this is bad for equities, especially multi-nationals (recall the charts of some of the big multi-nationals I posted last week all in downtrend or trading against any market strength.
An hourly chart depicting the downtrend, a new low is likely.
This is confirmed in charts like the Arm's Index and especially in my market breadth post from last week showing fewer stocks participating in any market moves up, actually more stocks now , versus roughly the same price levels we saw in the last rally top are headed down. This again indicates that while the averages themselves are trading at recovery highs, more stocks then ever, as compared to the equivalent highs, are trading down-this is thin market breadth and taken with “dumb money's extremely bullish sentiment, it's a major warning sign.
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