May 17, 2012 at 09:29 AM EDT
Investor Sentiment Says Correction Has Further To Go.
Thursday, May 17, 9:25 a.m. The weekly poll of its members by the American Association of Individual Investors is moving toward a level of bearishness usually associated with market lows, but has some ways to go yet. This week’s poll was released last night and shows only 23.6% now bullish, and 46.0% bearish. We consider [...]

Thursday, May 17, 9:25 a.m.

The weekly poll of its members by the American Association of Individual Investors is moving toward a level of bearishness usually associated with market lows, but has some ways to go yet.

This week’s poll was released last night and shows only 23.6% now bullish, and 46.0% bearish. We consider the AAII poll to potentially be in the vicinity of a correction bottom when bearishness exceeds 55% and bullishness is in the range of 16% to 20%.

The Consensus Inc. Sentiment Index, which was at a very bullish 78% in March, above the 75% level that Consensus Inc. says is “overbought bullishness indicating a downside reversal in trend may be imminent”, has cooled off, but is still 61% bullish. Consensus Inc. considers 25% bullish to be the oversold bullish level usually seen at correction bottoms.

And then there is the VIX Index (aka the Fear Index).

As the correction began the VIX began rising out of the extreme low fear zone usually seen at market and rally tops.

But it has quite a ways to go if it is to reach the level of fear usually seen at correction lows, which is at the level of the dotted line in the chart. We won’t dwell on the fact that, as the chart shows, fear can get considerably higher than the dotted line before correction bottoms are reached.

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So, based on investor sentiment anyway, it looks like the correction has further to run.

Of course, markets can’t be timed by sentiment alone.

A Tip For Those Planning To Buy Facebook Shares.

Public investors tend to place ‘market orders’ on their trades. That is they are willing to pay whatever the asking price is at the time. In a fast moving market, with orders piling up in the orders books that can be costly.

As Robert Schwartz, professor of finance at Baruch College, is quoted in today’s Wall Street Journal, “The use of market orders, often favored by retail investors who just want to buy or sell quickly at the going market rate, can leave investors exposed. The order book can clear out, and if it does, there’s no safety net.”

That had happened so often to small investors scrambling to get in at any price on a new issue in all the excitement that surrounds an IPO, that the Financial Industry Regulatory Authority (Finra) detailed rules forbidding ‘market orders’ at the opening of new IPO’s in late 2010, but they weren’t implemented until September, 2011.

In the meantime, as one example of many, website Zillow Inc priced its IPO at $20 a share. The first public trades went off at $60 and then fell 25% to $45 just seconds later. Brokers blamed it on an influx of initial public ‘market orders’ to buy at whatever price sellers were asking. As soon as those wild asking prices were cleared out the price dropped.

Investors will apparently get some protection from themselves when Facebook initially trades, since brokers have been reminded of the Finra rule, and will block ‘market orders’ at the opening, only executing ‘limit orders’ that specify a specific price the buyer is willing to pay.

Investors just can’t catch a break from Wall Street.

Here we go again in another correction. The S&P 500 was at 1,415 in March. It closed yesterday at 1,328.

And so far all the way it’s been “Support should be just below at 1,405.” “Support should be just below at 1,400.” Then at 1,389, 1,375, 1,366, or whatever. Never more than a fraction lower than each low reached. It sure works to keep investors in, even those who intended to take profits and even downside positioning in the next correction. Instead it works to keep them ‘buying the dips’ all the way down in corrections.

I look at each of those supposed next support levels and hardly ever see what they possibly could be based on. I look at trendlines, various moving averages, previous lows, Fibonacci retracement levels, whatever, but I guess I am too dumb to spot the potential supports so fractionally close to each other each time the latest is violated.

Subscribers to Street Smart Report: A hotline from last evening, and the new issue of the newsletter are in the subscribers’ area of the Street Smart Report website. And please stay tuned to the hotline for more potential portfolio changes!

To read my weekend newspaper column ‘Plunging Commodity Prices Are Ominous For Stock Market’ Click here.

Yesterday in the U.S. Market.

Another ugly day, with a failed mid-day attempt to recover and then a late day sell-off.

The Dow closed down 125 points, or 1.0%. The S&P 500 closed down 1.1%. The NYSE Composite closed down 1.4%. The Nasdaq closed down 1.1%. The Nasdaq 100 closed down 1.0%. The Russell 2000 closed down 1.4%. The DJ Transportation Avg. closed down 0.8%. The DJ Utilities Avg closed down 0.4%.

Gold plunged another $26 an ounce to $1,557 an ounce.

Oil closed down another $1.69 a barrel at $94.44 a barrel.

The U.S. dollar etf UUP closed up 0.4%.

The U.S. Treasury bond etf TLT closed up 1.4%.

Yesterday in European Markets.

European markets were mixed yesterday. London closed down 0.6%. Germany closed down 0.3%. But France closed up 0.3%.

Asian Markets Plunged Wednesday Night But Bounced Some Last Night.

The DJ Asia-Pacific Index closed down a big 2.3% Wednesday night, Hong Kong and South Korea closing down more than 3%.

The DJ Asia-Pacific Index closed up 0.6% last night.

Among individual markets last night:

Australia closed down 0.2%. China closed up 1.4%. Hong Kong closed down 0.3%. India closed up 0.3%. Indonesia closed down 1.6%. Japan closed up 0.9%. Malaysia closed up 0.6%. New Zealand closed up 0.2%. South Korea closed up 0.3%. Singapore closed down 0.3%. Taiwan closed up 1.7%. Thailand closed up 0.2%.

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Markets This Morning:

European markets are down again this morning. The London FTSE is down 1.0%. The German DAX is down 0.4%. France’s CAC is down 0.6%.

Oil is up $.65 a barrel at $93.45.

Gold is bouncing back $19 an ounce at $1,555.

This Morning in the U.S. Market:

This week is an average week for potential market-moving economic reports, which include the Consumer Price Index, Retail Sales, Housing Starts, FOMC minutes, the Fed’s Phila Fed Index, etc. To see the full list and times for each release click here, and look at the left side of the page it takes you to.

There were no reports Monday.

On Tuesday it was reported that the Consumer Price Index was unchanged in April, while the core rate (with food and energy costs removed) was up 0.2%. And Retail Sales edged up just 0.1% in April. But the Empire State (NY) Mfg Index bounced back to 17.1 in May from 6.6 in April. The Housing Market Index, which measures the sentiment of home-builders, rose to 29 in May from 24 in April. That was better than forecasts of an improvement to 27, but the index remains pessimistic, well below the level of 50 that indicates that at least 50% of builders are optimistic.

Yesterday’s reports were that new housing starts were up 2.6% in April, no doubt contributing to the improvement in home-builder sentiment in May. But permits for future starts fell 7.0%. And Industrial Production was up 1.1% in April, better than the forecast of a 0.7% increase. But that was helped by March production, previously reported as unchanged, being revised down to minus 0.6%. And the minutes of the Fed’s last FOMC meeting showed the usual debates between Fed governors differing in their assessments of the economy, inflation, and how long the Fed should say it will keep interest rates low, none of which changes what the Fed inferred in its statement after the meeting.   

This morning’s report was that new weekly unemployment claims were unchanged last week at 370,000. The four-week moving average of claims fell by 4,750 to 375,000.

Still to come are the Phila Fed Index, and the Leading Economic Indicator Index, both of which will be released at 10 a.m.

The pre-open indicators have been hovering both sides of unchanged all morning.

Our Pre-Open Indicators:

Our pre-open indicators are pointing to the Dow being up 10 points or so in the early going, not meaningful at all as to direction later in the day.

Subscribers to Street Smart Report: A hotline from last evening, and the new issue of the newsletter of yesterday are in the subscribers’ area of the Street Smart Report website. And please stay tuned to the hotline for more potential portfolio changes!

To read my weekend newspaper column ‘Plunging Commodity Prices Are Ominous For Stock Market’ Click here.

I’ll be back with the next regular blog post on Saturday morning, as usual later than the week-day posts, probably around 11:00 a.m. (eastern time).

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