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.

Comments

One Response to “Technical talk: Sentiment review”

1. rootless cosmopolitan Says:
   April 11th, 2009 at 5:32 pm

   There are two major log­i­cal flaws in the graph­ics and the nar­ra­tive to the graph­ics (again):

   1. The allo­ca­tion of equity has decreased rel­a­tive to cash due to col­laps­ing equity prices. Let’s look at the charts. The allo­ca­tion had been about 64% stocks, 22% cash (, and 14% every­thing else) in 2007 before the stock mar­ket crashed. Assum­ing equity prices drop by 50%, every­thing else stays the same, the num­bers will be 32, 22, 14, or, the re-calculated rel­a­tive allo­ca­tions will be 47% stocks, 32% cash, and 21% every­thing else, respec­tively. And, Voila! The rel­a­tive allo­ca­tion of stocks and cash is about in the range what the graph­ics show. Thus, the con­clu­sion in the nar­ra­tive, that indi­vid­ual investors had more extra liq­uid­ity now to drive the equity prices up, com­pared to the time before the crash, is log­i­cally fallacious.

   2. There is no money flow­ing “in” the stock mar­kets or between the mar­kets, when equity rises, or “out” off the stock mar­ket, when equity prices fall. The stock mar­ket isn’t a con­tainer, into which money is poured and accu­mu­lated, or from which money is drained. Although, it is every day talk to say, “I put my money into stocks”, when I buy equity, the money I spent won’t be “in stocks” after­ward, it will go into the pock­ets of the ones who sell the equity to me. From the per­spec­tive of the seller an equal amount of money is taken “out” off the stock mar­ket, which I put “in” stocks. The money isn’t flow­ing in the mar­kets, or out of them, it flows between house­holds. The mar­kets are inter­faces between the house­holds that exchange goods or assets for money and vice versa. This shows, though, that the every day talk actu­ally reflects a wrong per­cep­tion of eco­nomic processes, if the wrong per­cep­tion even appears in charts and nar­ra­tives like above, made by peo­ple who should know it bet­ter. Thus, the whole “money on the side­lines” talk is based on false assump­tions and perceptions.

   My con­clu­sion regard­ing the Fusion IQ Sen­ti­ment Review is that I don’t see much value in it, since the con­clu­sions in the review are based on the log­i­cally false pre­sump­tions above.

   Of course, all this doesn’t mean at all that equity prices can’t go fur­ther up from here.

   rc