Investors Intelligence
Stock newsletter editors were on average unchanged from last week: bulls 41.4% and bears 29.9%.

AAII
The weekly retail investor sentiment survey from AAII shows a sudden jump in optimism: the bulls came in at 38% - a 10% point jump from last week. While the bears are 45% of respondents, a drop of 4% points from last week.

It is difficult to parse the meaning of this move back and forth. First much more bearish, now decidedly less so. Since we didn’t really reach any levels of historical significance with this sentiment indicator, the only thing we can safely say is that retail investors are skittish but not despondent.

Barron’s Confidence Index
This is among Richard Russell’s favorite indicators. The Barron’s Confidence Index is a ratio between Barron’s high-grade corporate bond index and Barron’s intermediate-grade corporate bond index. So basically it shows how much or how little demand there is in the more speculative, lower grade bond market.

The lower the Confidence Index, the less inclined people are to accept risk in the bond market and the higher, the more they are willing to take on risk. Historically 60 has been considered an extremely low level. But as you can see, we easily sliced through that level during last year’s credit market turmoil:

Source: Plexus Asset Management

But since the low late last year, the credit market has improved and we are now trying to return to normalcy. There is a high correlation between this indicator and the equity markets, which is why Russell follows it so keenly. It can be considered a good proxy not only for the bond sentiment but for the over all appetite for risk. There are many indications which confirm this point of view, for example the return to earth of the TED spread.

You can follow the indicator by rifling through the pages of Barron’s print edition or you can alternatively find it online.

Magazine Cover Indicator
This week’s magazine cover sentiment comes courtesy of Business Week, purveyor of many fine contrarian cover indicators in the past. This week’s cover asks:

Can You Afford to Retire?
After watching their savings evaporate and their net worth plunge, many are giving up on retirement planning.

The graphics is a clever play on the falling stock market, in a thick red line… which transforms into a beach lounge chair.

On the whole it isn’t ’slash your wrists’ or ‘Death of Equities’ gloomy but you have to wonder if this kind of cover would have even been contemplated in 2007.

This brings us to total cumulative job losses of 9 million in this recession (so far!). That’s much more than the historical average in previous cycles.

Not surprisingly, the stock market took a nose dive on the news but you could argue that it has been acting the way it has for the past two months, meandering with no real direction.

This chart compares the most recent recession’s job losses to the previous cycle as well as the over all post World War II average:

Source: Chart of the Day

As the chart clearly shows, this is much more than a run of the mill recession. We’re seeing about 3 times more job losses than in the past. Had this been a ‘normal’ cycle, we would have seen a trough in April 2009.

And even more troubling, we’re seeing signs of wage deflation. Average weekly earnings fell 0.3% in June. On an annual basis, that’s equivalent to about -1.6% compared to +1.8% last year (and +5.2% in 2007).

Here’s another chart showing more granular data for past recessions:

Source: Calculated Risk

The only post World War II recession which had deeper job losses was in 1948. But we are fast approaching that record. On the plus side, the recovery back then was just as sharp.

The above is a short clip from the full video, available free here.

For more information, check out the implied deflation in the TIPS spread and the message of Dr. Copper.

This is a topic that I’ve been harping on ever since last year, as a barrel went for $135: What is really going on with the price of crude oil?

It also confirms the previous chart showing the stampede of hedge funds and other large speculators to the long side of oil. Back then I couldn’t prove what was going on but the inflation adjusted price of oil certainly looked like a bubble.

There wouldn’t be a problem of course if these powerful market participants were taking both or either sides in legitimate speculation or hedging. But there is a problem for everyone, including these same institutions, when they pile into only one side, continuously going long the crude oil futures.

According to the article:

Passive investors increased their crude-oil holdings to the equivalent of more than 600 million barrels in June, up more than 30% from the end of last year…

So what is going on? How can these behemoth institutional players treat the crude oil market like their very own ponzi scheme? Last year the effects on the world economy were devastating. Wealthy economies stalled into a recession and poor economies were thrown into chaos as staple food prices soared.

Isn’t there a regulation to prevent the manipulative “walking up” of prices in commodities? Yes, yes there is. Or more accurately there was.

Matt Taibbi’s scorching article on Goldman Sachs (GS) in the most recent edition of Rolling Stone magazine explains. There was a 1936 government regulation which had successfully stopped this type of shenanigan. In effect it did not allow large speculators to lean on any commodity market and crowd out real producers and consumers. Until 1991. That’s when Goldman Sachs’ (GS) commodities subsidiary, J. Aron, request an exemption based on the flimsiest justification.

Amazingly enough it got it. And over the years the CFTC handed out 14 other similar exemptions. Goldman and its ilk were busy with a few other schemes and it wasn’t for a while that they started to really take advantage of the loophole they had gained. What followed was nothing short of astonishing. For example:

Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent.

What makes this even more astonishing is that last year’s oil spike (or bubble) happened when the world was awash in oil supply and faced a drastically reduced oil demand!

…according to the US Energy Information Administration,the world oil supply rose from 85.24 million barrels a day to 85.72 million. Over the same period, world oil demand dropped from 86.82 million barrels a day to 86.07 million.

By the summer of 2008, in fact, commodities speculators had bought and stockpiled enough oil futures to fill 1.1 billion barrels of crude, which meant that speculators owned more future oil on paper than there was real, physical oil stored in all of the country’s commercial storage tanks and the Strategic Petroleum Reserve combined.

This whole bear market has been a massive lesson in the validity and value of smart government regulations. As Ritholtz counts off in his book “Bailout Nation”, over a number of years and even decades, the threads of regulation where one by one removed. As the regulatory framework deteriorated in tatters, things started to go wrong.

Of course, as you may recall, that explanation was not the one offered when we were in the thick of things last year. The old and tired theory of “Peak Oil” was on everyone’s lips and many actually believed it.

The problem with that is, in the market when something is obvious to everyone, it is obviously false. And as I’ve said before many times, while no one disputes that the supply of oil is finite, it is a non sequitur to posit that as this resource is exhausted, the price of oil will spike.

If you believe otherwise, then get into your time machine, go back to the 1800’s and corner the whale blubber market.

Thanks to a new service from Google (GOOG) called Google Trends we can look at the popularity of various searches over time and even across different geographic areas. Persevering readers might remember that we first looked at this new measure of sentiment back in January 2008: Hunting For Sentiment Data.

Since then we’ve continued to collect data for this so here’s an updated chart comparing that Google Trend to the S&P 500 Index (SPX):

There was a massive spike which corresponds to October 5th 2008 as the stock market was barreling down head first. There was a smaller spike which corresponds to the March 2009 low.

Other than that I can’t see a clear relationship between the two. Perhaps we need more data or perhaps the keyword isn’t the right one. I’m sure one of you out there who is more statistically inclined can take the data and hash something out. If you’re interested, drop me a note and I’ll forward you the spreadsheet.

In any case, looking at the most recent data not very many people are concerned about a stock market crash. The recent numbers shows the kind of apathy last seen August 17th, 2008 and December 23rd, 2007.

According to the spokesperson for TPB, Peter Sunde, GGF approached the owners of TPB a few months ago and negotiations finalized recently with the transaction expected to be completed by August 2009.

It will be interesting to see how this will effect the ongoing attempts by the RIAA/MPAA to eliminate sites like the Pirate Bay. Obviously, as a public company, they will be an easy target. But according to the unofficial sources, the Pirate Bay is going to decentralize their technological structure even more so that a separate company is handling the trackers and another the torrent listings.

Source: AktieTorget

It remains to be seen if this is a way for the Pirate Bay to continue its swashbuckling ways or if this means a change in their business model. In any case, if you’re brave enough, you can now own a part of this ongoing saga.

The shares of GGF jumped after the announcement but looking at the long term chart (above) there is a massive amount of overhead resistance.

In keeping with everyone’s watchful expectation, the S&P 500’s 50 day moving average closed at 900.54 on June 24th 2009, rising slightly higher than the 200 moving average (897.19).

Since we’ve compared the current market to the nascent 2003 bull market in many different ways: breadth, wedge formation, flag formation, Weinstein analysis, etc. It is only natural then to take a look at the golden cross that presaged the bull market in 2003:

In the charts, the blue line is the 50 day moving average and the red line is the 200 day moving average. Marked by the green arrow, the medium term moving average crossed higher than the longer term moving average in May 15th, 2003.

But does the golden cross really deserve its bullish moniker? Obviously we can’t base any conclusions on one single observation in 2003.

Vincent Delisle of Scotia Capital looked at 14 previous S&P 500 bull markets (lasting on average 49 months and rising 149%). From these only about 17% of the gains materialized before a golden cross signal was given. After 12 months of a signal the average gain was 23%, implying that a golden cross doesn’t arrive too late to provide forward returns. Delisle adds that a golden cross appears to have more validity when it occurs with a rising 200 day moving average - something we had in 2003 but do not have now.

By the way, a “death cross” is the opposite and can be seen on the above chart marked by a red down arrow.

According to Jason Goepfert of SentimenTrader, any edge offered by golden crosses is minimal. Identifying the same distinction as suggested by Delisle, he looked at only instances where the 200 day moving average is declining.

Goepfert concludes:

…the returns going forward, up to six months later, were little better than random and not statistically significant. In fact, in the shorter-term they were a little worse than random. Only when we look out a year do we see some out-performance.

But he does agree with Delisle that most ‘unsuccessful’ golden cross signals coincide with the early 1940’s and that more recent examples have had much more success. The S&P 500 was positive 11 out of 13 times since 1942 with an average annual return of 18%.

Finally, a reader was kind enough to forward a recent research report from Merrill Lynch on golden crosses. I’ve added it to the Free Trading Resource Section and you can download it from the Articles & Reports folder.

In the Merrill Lynch report prepared by Mary Ann Bartels, it continues to distinguish between golden crosses that happen with a downward long term moving average and those when the long term moving average is rising:

Of the 42 Golden Cross signals triggered since 1928, 20 have occurred with the 200-day moving average in a declining trend or lower than it was 30 trading sessions ago. These signals on average have generated 12-month returns of 13.3%.

The remaining 22 signals occurred when the 200-day moving average was rising or higher than it was 30 trading sessions ago. The returns for these signals were much lower and on average generated 12-month returns of 5.7%.

This is bullish for today’s market since the long term moving average of the S&P 500 is still falling. The report is full of insight backed by stats so I highly recommend you download it and take a look. Bartels also adds a new overlay by looking at golden crosses that happen during a recession (as defined by NBER). Signals that meet the condition of a declining 200 MA and a recession suddenly produce an average 12 months return of 23.3%.

Not surprisingly, her conclusion is that “the equity market remains in a base-building process that should lead to higher returns.”

Of course, that doesn’t mean that the market automatically heads higher and higher from here. Base building can be soul crushing. Ask any trader that lived through the 1970’s - no wonder everyone started wearing platform shoes

Source: Chart of the Day

To be honest, I don’t really like the Dow Jones Index so I’ve plotted the point at which the current rally reached its maximum as measured by the Standard & Poors 500 Index in green - a 37.4% increase from the spring lows (reached on May 8th 2009). Since then, the stock market has just slithered sideways anyway.

Any way you measure it, either by the Dow or the S&P 500, the present rally has been stronger than most of the bear market rallies in the 1930’s. The outlier is the November 1929 rally which lasted 155 days and took the Dow 48% higher.

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For the complete list, follow the graphic below:

And remember to check back regularly since there are interesting links added throughout the week.

Week Ahead

Sentiment Surveys
Figures from ChartCraft’s Investors Intelligence show stock newsletter editors to be similarly bullish to last week: 43.6% bullish and 28.7% bearish. Not only is this little changed from last week, it leaves us mired in a neutral morass which is not really helpful in determining a trend.

In contrast, the weekly AAII data is a bit more attention grabbing. As measured by the American Association of Individual Investors, the percentage of US retail investors who are bearish increased by 3% points to 49% and those who are bullish declined by 5% points to just 28%.

As you might recall, we saw a record setting AAII bearishness that coincided with the start of the spring rally. This week’s sentiment figures are the most pessimistic since then. While some would interpret this as bullish for the market, it may not be that simple.

While sentiment is helpful in pointing out inflection points at extremes, the rest of the time as it meanders it is either not really helpful at all. If you really want to analyze it, sentiment tends to go along with the trend in the market until it tips into a severely lopsided situation. So in fact, while we are not seeing extremes, sentiment can be seen as a guide to confirm a trend, rather than as a contrarian indicator. This is a distinction that makes sentiment much harder to analyze than merely zigging when it zags.

Therefore, since the AAII data isn’t at an extreme level of bearishness, we can’t really use it as a contrarian measure. All we can say is that fewer people are bullish, which means that less and less are feeling like putting money to work. That isn’t necessarily great news if you’re bullish.

Finally, the Hulbert Stock Newsletter Sentiment Index which is another measure of stock newsletter editor’s stance has fallen from 45.8% early in June 2009 to just 15.8% in recent days. Such a retreat confirms what we are seeing in the other sentiment data (above); bullishness is fading to varying degrees but it is not yet at a point of extreme. Mark Hulbert, the creator and keeper of this sentiment indicator, believes that such a move has contrarian portent because while sentiment has fallen to levels last seen in early April, the market is much higher.

Options Sentiment
The CBOE put call ratio’s short term moving average is climbing higher after reaching a low in mid May 2009:

Keep in mind that the put call ratio has a slight upward bias so if you draw a line you can see the connection between the July and October 2007 put call ratio lows - which coincide with the bear market top. While this measure of sentiment has increased in recent weeks, it is a long ways off reaching previous highs of 0.85+.

Below is an updated chart of the ISEE Sentiment Index (equity only) which I showed about a month ago:

Similar to the CBOE put call ratio, we’ve seen a decrease in bullishness (notice that the ISE is inverted because it is a call put ratio). Since early June 2009, the 10 day moving average has come almost straight down from 181 to 152. But as you can see, it is far from an extreme low. On November 24th, 2008 the 10 day moving average of the equity only ISE call put ratio was 108 and on March 24th, 2008 it was 104.

I’d caution you to take all options analysis with a salt lick. Both the CBOE and ISE data has not conformed to historical ‘norms’ of sentiment analysis during this bear market. For example, notice that neither recognized the March 2009 lows.

Volatility
The CBOE volatility index (VIX) continued its slow, meandering crawl downwards this week. It closed a hair’s breadth below 26, which is the lowest it has been since September 15th 2008. The VIX has fallen off many radars because during this bear market it reached unheard of levels and as a result, what was once considered extreme is now the new ‘normal’. I suspect that it will be a long time until we can put this whole episode behind us and take a look at the VIX the way we used to before.