Senior Market Analyst, Chris Johnson, of Investor's Daily Edge warns investors of near-term market vulnerability.
Delray Beach, FL (PRWEB) May 19, 2007 -- The market has worked hard to track sideways after this run-up in positive sentiment. The S&P 500 is a mere 12 points higher over the past two weeks (about 0.7 percent), though it has traveled more than 50 points from its highs to lows since then. In other words, there's been a lot of motion with little to show for it.
According to Senior Market Analyst, Chris Johnson, of Investor's Daily Edge, "Now that earnings are largely out of the picture, investors are pinning their hopes on the Fed lowering interest rates. When? Well, that's anyone's guess. But as long as the market thinks (or perhaps should I say, hopes) rates are going down rather than up or even staying flat, prices will benefit."
Here are four factors to consider:
1. Last week's weak retail sales report, a typical "bad news is good news" situation. Stocks rallied on the weak news and on the unchanged PPI figure, on the feeling that the Fed's next move would be to drop rates. Of course, if the retailers had a strong month, it would have been a "good news is good news" situation. This is the stuff rallies feed on.
2. Option volume on the CBOE Volatility Index (VIX) also surged last week. The typical option investor doesn't trade these contracts. Thus, this activity is likely due to larger institutional traders, or the "smart money." In addition, the activity was heavily on the call side, indicating that the "smart money" is positioning itself for a rise in the VIX. The last time this happened was in February, right before the market pullback.
3. Investor polls are also showing continuing optimism that has me on edge. The Consensus of Bullish Market Opinion in this week's Barron's has the bulls at 78 percent. Readings that approach the 80-percent mark typically serve as a warning of impending weakness.
4. Investors Intelligence continues to run with the bulls, with the bullish percentage currently sitting at its highest point since the start of 2007. The bears are at a nine-month low, which is considered a "negative factor."
Johnson adds, "Not everyone is looking at stocks as optimistically as the "crowd," however. Last week, option activity surged with puts on a number of key issues traded by institutions. This indicates that the "smart money" may be preparing for a pullback in stocks."
He continues, "I like to look at qualitative or sentiment measures as well ... from a technical perspective, the major indices continue to teeter at overbought levels. At the same time, we're beginning to see some breakdowns of short-term technical support, specifically the 20-day moving average … given the optimistic sentiment that has built up in the market, the wavering technicals, and the shift in the fundamental picture from a positive earnings season to a questionable economic focus, I advise that you exercise some caution for the near term."
So what's a short-term protection plan investors should consider?
According to Johnson, "index puts are a good bet."
For more information and to read the full article, visit Investor's Daily Edge at http://www.investorsdailyedge.com/archive/index.php
About Chris Johnson
Before starting Johnson Research Group LLC, Chris worked in the financial services industry as a broker for 11 years and eight years as Director of Quantitative Analysis and Market Strategist with Schaeffer's Investment Research. Through this work, Chris became an expert at quantifying and studying the behavior of investors and financial markets, market sectors, and indices. Along the way, Chris has developed numerous market analysis tools that harness the powerful combination of behavioral and technical analysis.
Chris is a contributor to Investor's Daily Edge and frequent commentator on financial markets and is regularly seen in national print media, such as Barron's, Wall Street Journal, Financial Times, Bloomberg, USA Today, and the AP Newswire. In addition to being a guest on several radio shows, Chris appears regularly on CNBC, Bloomberg TV, and the Fox News Channel as an expert in the field of sentiment and investor behavior as well as technical analysis.
Investor's Daily Edge (www.investorsdailyedge.com) is a free investment newsletter that's delivered by email before the market opens. In each weekday issue you'll receive clear recommendations and practical strategies for protecting your portfolio and multiplying your money - whether the market is rising or falling.
For more information about our editors, or to set up an interview, please contact Wendy Montes de Oca at 561-921-0001 or visit www.investorsdailyedge.com.
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