Complacency Could Be Costly

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GuruFocus.com

Sat, Apr 23, 2016, 10:56 PM

- By Dr. Paul Price

Still a time for caution?

Last weekend I made the case for tempered enthusiasm on the market’s near-term direction.

One week ago the Thomson Reuters Insider Sell/Buy ratio was in bearish territory, put option buyers were nowhere to be found and the general public was feeling pretty optimistic in making net purchases of equity mutual funds. The last two of those factors are contrary signals to be taken negatively.

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SPY –5-Year Financial Data
The intrinsic value of SPY
Peter Lynch Chart of SPY

Despite those signs the Dow Jones Industrials, and my personal accounts, had plus signs attached in the week ended April ——. The five-day DJIA gained ….59%, tacking on almost that whole amount just on Monday.

Corporate officers and directors remained in a profit taking mode. Their sell to buy ratio dipped marginally, from ‘6 open market shares sold to each one bought, to around ‘5 times. That still firmly anchored this signal near its worst readings of the past –— months.

History says large upward moves rarely start from levels like last week’s.

The Equity Only Put/Call Ratio held steady over the last seven days. Option buyers are notoriously bad market timers. That’s why high put buying is considered a positive sign. The chart below shows the inverse correlation of the put to call ratio with movements in the S&P 5…….

Unfortunately for bulls, this indicator is now stuck in a region that suggests near-term risk.

Lipper reported that domestic equity mutual fund flows continued their recent descent. Individual investors sold about $–.7 billion more fund shares than they put in (on a rolling four-week basis).

Pulling in their horns should be treated as good news. Mutual fund market timers are almost as bad as put option buyers. Small investors made huge equity fund redemptions in January and February right as stocks were bottoming.

Present day readings on these various metrics thus lean fairly bearish on balance. That doesn’t mean you should sell everything and hunker down. It does suggest selectivity in buying and that locking in gains on shares that have run up significantly might be a good move.

From Feb. –— through April ——, the S&P 5…… ETF (SPY) posted a very nice –—.5‘% recovery with hardly any pullbacks along the way.