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| 10
REASONS FOR A BEAR TRAP!! |
| (May 22nd, 2006) The NYSE Members Report is compiled and released weekly by the SEC. The report includes short sales by NYSE specialists (smart money), NYSE members (all the well known Wall Street broker firms with insider knowledge) and the public (dumb money).The Chart of Interest below shows you the short sales by public investors, compared the the short sales by the Wall Street pros (NYSE members and NYSE specialists combined), according to the latest weekly NYSE Member Reports by the SEC. On the charts below you can see that the public short sales are highest near market bottoms because these people are usually wrong about the future direction of the market. Short selling by the public (dumb money) dwarfs now everything we have seen yet and it is unlikely that we are even near a top (chart of Dow Jones enclosed for comparison). The spread between public short sales (dumb money) and NYSE specialists short sales has also hit a new all-time high last week (3rd chart). |
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| (May 22nd, 2006) Every short seller anticipates a declining stock market. A profit is made if the stock is bought back at a lower price than when it was sold short. The chart below shows the weekly odd-lot short sales according to the SEC. Odd lot transactions are made by small investors who can not afford to buy or sell short a round lot of 100 shares of a stock. This indicator reflects the shorting activity of the smallest of the small guys who are usually dead wrong at bottoms and tops (dumb money). Since the introduction of options however it has lost some of its value. Many traders also sell in 99-share lots in fast markets for a better execution of their orders. Year-end tax selling and subsequent reinvestment distort the odd lot statistics as well in the end of December and early in January every year. But the odd lot short sales are nevertheless an excellent indicator to measure prevailing negative sentiment in the market (chart of dow Jones enclosed for comparison) |
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| (May
22nd, 2006) The chart below shows you the weekly Global Futures
Odd-Lot Differential Index. This index is simply calculated by subtracting
the weekly odd-lot purchases from the weekly odd-lot sales. A 10-day moving
average is applied to smooth out the swings. High readings appear near market
tops and minus readings near bottoms. This index indicates the market sentiment
of small investors who purchase less than 100 shares of a stock (dumb money).
These market participants are usually wrong about the direction of the market
and this indicator is therefore considered to be a contrary opinion sentiment
indicator. Right now they are scared to buy and this is a bullish sign.
The index looks even more bullish if it's calculated in dollars (2nd chart).
This indicator confirms the bullish readings (for contrarians) of the Rydex
Ursa/Nova ratio. |
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| (May
22nd, 2006) A good sentiment indicator is the Rydex Nova/Ursa ratio
because it is backed by hard cash and not just polls. It reflects the sentiment
of the small guys who put their money into funds. Speculators who invest
in the Rydex Nova fund are considered bullish on stocks because the fund
has a target performance benchmark equal to 150% of the S&P 500 index
(SPX). The Ursa (bear) fund is designed to provide a performance inverse
to that of the SPX (also 150%) by using a combination of short selling and
options on stock index futures. Investors in this fund are considered bearish
on stocks. Specifically, we divide the total assets in the Nova fund by
the total assets in the Ursa fund according to a proprietary formula to
arrive at a Nova/Ursa ratio. A high Nova/Ursa ratio indicates an extreme
amount of optimism (everyone investing in Nova) and is considered bearish
by contrarians. A low Nova/Ursa ratio indicates an extreme amount of pessimism
(everyone flocking to Ursa). This is a contrary indicator and it gives now
a buy signal (chart of Dow jones enclosed for comparison). |
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| (May
22nd,2006) When downside volume accounts for 90% or more of total
NYSE volume, technicians talk about a wash-out or selling climax. In recent
decades, a 90% down day meant a low was at least near, if not at hand. The
Chart of Interest below shows you the last four selling climaxes and they
indicated that downside risk was limited afterwards. (Chart of Dow Jones
enclosed for comparison) |
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| (May 22nd,2006) The Dow Jones is still above its 200-day moving average. |
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| (May 22nd,2006) Finally we want to take a closer look at bonds. Commercial hedgers (smart money) have the lowest short position in T-Bond futures for many years while small traders (dumb money) are short like never before. Commercial hedgers hold a significant informational edge over other traders as far as fundamental supply-and-demand statistics are concerned. They tend to be early, but they are usually right on the long run, quite contrary to the small traders. Extreme divergences in long and short positions of small traders, large speculators and commercial hedgers have proven to be reliable indicators of important trend changes. In such cases it is not advisable to bet against the commercial hedgers. |
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