February 10, 2015
Survey Results Could Hold the Key to Next Market Advance
By John Kosar
All major U.S. indices closed in positive territory last week, reversing the previous week's negative closes, led by the Dow Jones Industrial Average, which gained 3.8%. This good one-week showing was enough to nudge the industrials into positive territory for 2015; the index is up just over one point year-to-date, for a return of 0.01%.
All other major indices are still in negative territory for 2015, except for the small-cap Russell 2000, which is now up 0.1%. I'll discuss this market-leading index in more detail later in today's report.
Back in the Jan. 19 Market Outlook, I pointed out that my own ETF-based metric showed the biggest one-week inflow of investor assets was into energy, and that, should this expansion in assets continue, it would "suggest an emerging buying opportunity in this unloved and washed-out sector."
This expansion of assets into energy has indeed continued, as my metric now shows that the biggest inflow of sector bet-related assets over the past one-week, three-week and three-month periods have all been into that sector. Meanwhile, the Energy Select Sector SPDR ETF (NYSE: XLE) has already outperformed the SPDR S&P 500 ETF (NYSE: SPY) by 4.2 percentage points since my Jan. 19 report, and is poised for more outperformance in the weeks, and potentially months, ahead.
When Being Too Bearish Can be Bullish for Stocks
Last Wednesday, during a CNBC interview for Yahoo Finance's "Talking Numbers" column, I discussed a survey that showed individual futures traders were at a multiyear "least bullish" extreme on the Nasdaq 100, and pointed out that similar extremes had closely coincided with every significant bottom in this market-leading index in recent history. An updated version of that chart appears below.
Retail investors tend to be trend followers, which means they typically buy an asset when its price is rising and sell it when prices are declining. As a result, they tend to be the most bullish at market tops and the least bullish at market bottoms. Their current least-bullish extreme suggests that the Nasdaq 100 is at or near another important bottom now.
Watch for a Bullish Breakout in Small Caps
Back in the Oct. 6 Market Outlook, I pointed out that the Russell 2000 was testing the lower boundary of a broad period of sideways price activity that began in March 2014, and said that the index was amid favorable conditions for a rebound. The next chart shows that the rebound occurred as expected. After first declining slightly below the pattern's lower boundary at 1,083, the Russell has since risen by 165 points or 15.9% to close at 1,205 on Friday, just below the upper boundary at 1,213.
Any further strength in the index that results in a sustained rise above 1,213 would indicate that the Russell 2000's larger 2013 advance has resumed, and would portend even more strength in the upcoming months. The current least-bullish extreme in the Nasdaq 100 by retail investors, as shown in the first chart, suggests this resumption of the larger bullish trend in the Russell is likely to occur this month.
Gold at Near-Term Decision Point
In the Jan. 19 report, I also said that SPDR Gold Shares' (NYSE: GLD) rise above its 200-day moving average, a widely watched major trend proxy, during the previous two sessions cleared the way for an additional, eventual 4.5% advance to $128. The next chart shows that, after rising as high as $125.58 on Jan. 22, GLD has since slipped back below its 200-day moving average to close at $118.64 on Friday.
Despite this recent setback in GLD, as long as the $117.05 neckline of the bullish chart pattern -- an inverse head and shoulders that the ETF initially broke above in mid-January -- contains prices as underlying support, its $128 upside target will remain valid. Conversely, a significant and sustained decline below $117.05 would indicate that investors have collectively changed their mind on the upcoming direction in gold prices, which would clear the way for more near-term weakness and a potential retest of the early January lows near $112.
Since November, I have been stating that, aside from minor price corrections, I was expecting a U.S. stock market advance into early to mid-2015, amid rebounds in commodity prices and long-term interest rates fueled by continued improvement in the U.S. economy. This week, a least-bullish extreme on the Nasdaq 100 by a survey of retail investors suggests favorable conditions for the rise in stock prices to begin. A sustained rise above 1,213 in the Russell 2000 would help confirm it is under way.
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