Random Thoughts for the Current Market Outlook

Retail investors continue to hate stocks, or at least they have continue to withdraw their money from equity mutual funds. According to the Investment Company Institute investors have withdrawn a net of more than $10 billion since the announcement of QE3 on September 13th. Since January 1st more than $100 billion has been withdrawn net from these same funds. The money has rotated into bond funds for the most part along with money markets. The average investor is not happy with the current economic picture or prospect of things improving near term.

AAII Bullish Sentiment indicator has likewise fallen to 33.9 which is the midpoint of the trading range for the indicator, having fallen from 43 two weeks ago. Again the investor didn’t like the Fed’s action on quantitative easing and they are voting with their feet and exiting equity positions.

Looking at the survey of investment advisers where the percentage of bullish has fallen from 54.2% to 46.8% since the FOMC meeting implementing QE3. This isn’t surprising either as advisers don’t want to experience another 2008. The rotation of money from equities to fixed income assets has also grown among the advisor community.

This exit among investors, individual or professional is a trend, and the volume reflects the lack of interest despite the markets move higher. We have to be aware of our surroundings as the data is released and points in a specific direction and in turn will either validate or invalidate our thesis. Stimulus  has been the support under stocks prices, but the effect of that stimulus is losing its drive. Therefore we are seeing money rotate away from risk in search of safety and confidence.

One area we are seeing money rotate from is high yield or junk bonds. The risk of the assets versus the near term returns are going in the wrong direction. We have seen money flow rise on the exit side of late and that is worthy of note. They have not broken down nor have they triggered an exit signal technically, but we have to raise stops and manage the risk that could develop further. If you are invested in HYG or JNK adjust your stops according to the risk/reward you can stomach.

What is the future of crude oil? Flip of the coin from my view. The volatility has created some trading opportunities on either side of the commodity. On Monday OIL closed near support and followed up with a second inside day setting up a potential bounce trade. Either way the bigger question is the longer term outlook? At this point it isn’t clear enough to call. The downside is still my favored view for the near term with¬†a potential break lower. $87.50 is the support to watch for now. A break below that support level accelerates the downside. Let this story unfold and expect the volatility to remain.

I would be remiss if the topic of Apple wasn’t covered here relative to the recent moves. On September 21st the stock hit a new high at $705 and since has corrected nearly 10% closing near the $638 level. Is the trend over for the stock? Technically speaking the chart broke key support on Friday and confirmed the downside on Monday with a drop of 2.2%. The reasons given are all over the board for the decline, but one factor we all have to consider… the consumer globally is being pinched by the current economic picture. Thus the stock may be oversold short term, but there could be further downside ahead if the global economy¬†remains sluggish. Apple is¬†a trade and watch stock for the near term.

On a technical note the small cap stocks have not bounced off support with the other indexes. IWM, iShares Russell 2000 index ETF is testing $83.20 support with the 10 day moving average crossing below the 30 day. This is showing signs of weakness to momentum short term. No clear exit signal in play, but I would raise my stops to account for the weakness if you are looking short term. Longer term the trendline off the June low would be the key support level to watch. The lack of interest in the small cap index is another sign of investors avoiding the growth sectors of the market overall.

Watch the markets reaction to earnings as they start today. The warning signs are out, but we cannot assume anything at this point good or bad. One day at a time as the case is build for a continuation of the upside or a test lower for the broad market indexes.