Endangered Species vs. Sector Rotation

July 6, 2014

Weekly Market Outlook

By Mish Schneider


On Thursday of last week in Hawaii, The National Marine Fisheries Service classified the scalloped hammerhead shark as “endangered” which means they are likely to face the risk of extinction in the future. The demand for shark fin soup has led to over fishing of the species. Fortunately for the sharks, this means they will soon receive protection from international agencies.

On the opposite side of the country, Wall Street may also be on the verge of an endangered species dilemma of its own!

The market’s recent stampede higher caused me to look into how strong the bull population currently is in an effort to quantify whether or not the long trade in equities may be “too crowded”.

I took a quick look at some various sentiment measures at recent points when the market has either tried, or succeed to push to new highs to see if the bullish sentiment readings were climbing. Much to my surprise, I found that the strong market action has not led to an overly bullish sentiment reading (with one exception).

In fact, the bull’s population seems to have remained relatively stable since the beginning of the year.

The one case in which bullishness seems to have accelerated is in the data collected by TimingResearch and it's noteworthy that in this data the traders’ time frame is weekly. So they were dead right last week, and we’ll continue to watch them closely.

Outlook-20140703-SPY-600

Outlook-20140703-SentimentData

If you look at the chart and data table above you’ll see the time frames and data from which I’ve concluded that the bull population has remained steady. If the recent rise in the market were to be a typical exuberant top in the making, the bullish sentiment would be climbing and be at higher levels.

However, you may notice, as I did, that the number of bears is reaching levels that could be considered “endangered”.

Unlike the scalloped hammerhead, the bears will not be offered any protection from international agencies, but we all know that bears in the markets only hibernate. Bears don’t go extinct!

And veteran traders know that the most dangerous bears are the ones you can’t see. Finally, the best time to watch out for the bears is when you can’t find them!

Strictly by the numbers, it’s hard to cry "bears" now, or sound any alarms yet, but it is worth noting that it’s not just the bull’s population we should be watching.

In contrast to the declining population of bears in the market, there has been another interesting development in terms of sector rotation.

If you were to guess which of the 9 market sectors, as defined by the SPDR ETFs, was the best performer for the year until last week, which sector would you chose?

This week’s market outlook video will cover this condition, which may surprise you since it is NOT tech or healthcare. Additionally, the sector rotation that occurred last week may have important implications for the markets ability to continue on its upward path with or without a healthy bear population.

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