Trader’s Narrative

For economic and market news and to see what interesting reading you may have missed last week, check out the list below. To see it all, go to news.tradersnarrative.com:

• Elizabeth Warren on the Economy & Stock Market
• When Is There No Opportunity for Your Trading?
• The Guys Who Bet Against the Bubble and Won
• The Lloyd’s Prayer (doing God’s work is hard work)
• Get a FREE Subscription to SFO Magazine (US residents only)
• Strategist at Morgan Stanley: Multi-Year Bull Market
• Wall St Fights Congressional Momentum to Break Up Banks
• SocGen’s top analyst sees market lows next year
• Analysis of corporate insiders’ behavior
• Has Gold Topped Out for the Year?
• Peter Eliades throws cold water on rally

The above is a small sample, for the complete list, follow the graphic link below to news.tradersnarrative.com:

And remember to check back during the week as there are interesting links added throughout the week. If you are a twitter user, add the news.tradersnarrative.com twitter stream to get new stories in real time.

The Week Ahead:

This week’s sentiment run-down has a lot of cross currents so be careful:

AAII
After last week’s sudden stampede to an extremely gloomy stance, the weekly survey of retail investors by the American Association of Individual Investors is showing a dramatic realignment to perfectly neutral. The bears and bulls both stand at 39% after a -/+17% percentage point change.

Investors Intelligence
The percentage of stock market newsletter editors who are bullish on the market fell to 44.4% from 48.3%, while bearish sentiment rose 2% points to 26.7%. This is a slight decrease in the ratio of bulls to bears, since we’ve been so accustomed to seeing it at 2:1.

To thoroughly confuse those with any leftover conviction, according to Consensus bulls on the stock market are at 74% - a previous high not seen since October 2007. Similarly, 78% are bullish on gold.

Daily Sentiment Indicator
The Daily Sentiment Indicator, calculated by Jake Bernstein, is showing an elevated level of optimism. The 10 day moving average of the DSI is at 70%, having fallen from the recent peak of 75%:

Consumer Confidence
The preliminary Reuters/University of Michigan Consumer Confidence index fell to a 3 month low of 66 (from 70.6 in October). Most analysts and economists expected a small increase in confidence. While it was unexpected, it shouldn’t be that surprising since the media has been filled with reports of the unemployment rate hitting the psychologically important 10% level. And as this is a preliminary number, it could be revised later.

The German ZEW Index
Looking across the pond, the most popular measure of German economic confidence, the ZEW index dropped to 51.1 in November from 56.0. The consensus was expecting 55.0. Meanwhile, the current situation index increased 2 points to -72.2 - with expectations being a rise to -69.

Mutual Fund Cash Positions
Standing on the “shoulder of giants” (aka Jason Goepfert), we looked at the level of cash being held by US equity mutual funds back in September. While being a ’sloppy’ market timing tool, its message was decidedly foreboding. And with the passage of some time, it has become more so as mutual fund managers are holding even less cash:

Corporate Insiders
According to Vickers Insider Report, corporate insiders have sharply curtailed their selling. Current buy/sell activity is 1:1.96 - that is on average, insiders are selling 2 shares for each they buy. Since compensation of corporate executives includes a healthy dollop of shares, it is natural for their activity to be skewed. However, since the long term average of the buy/sell ratio is closer to 1:6.5, the current level is rather bullish.

Google Investing Index
Google (GOOD) is a great source for sentiment on the stock market. Google Trends is where the search trends around the world are categorized allowing us a window into the public’s mood. For example, how much people search for “stock market crash” or “buy gold”.

Another metric is the Google Investing Index (GII) which tracks an amalgam of keywords related to investing such as “stock, finance, stocks” and so on. The peak of searches for these keywords was late last year on October 10th 2008 when there was an 86% increase in year over year activity:

Source: Google Finance

The opposite happened just recently in mid October 2009 when there was a decrease of 52% in people’s interest in all things related to investing. At least according to this specific measure. If capitulation is defined by total disinterest and apathy then based on the GII, we’ve arrived. This nicely dovetails with the complete withdrawal of US retail mutual fund investors.

Greybeards
Every once in a while I like to check in with a market ‘greybeard’ - my name for someone who has been around enough to see several cycles and has made more correct calls than not. This week, we review Albert Edwards at Societe Generale. He is an avowed bear who completely dismisses any talk of a recovery or bull market.

In a recent research note he flagellates himself for not having seen the ensuing rally off the spring lows:

To be perfectly honest, as the market powered ahead, I, like so many others, waited for the pull-back that never arrived. Do I feel like a grade 1 moron? Yes, I most sincerely do. Should I be beaten mercilessly to within an inch of my miserable life? Definitely.But I remain convinced we are still in a structural bear market and that this economic recovery rests on such shallow foundations that it will be washed away by the first moderate wave.

Always the grump, Edwards expects China to go into a recession, expects a similar fate for the US in 2010 with new lows for the stock market and a deflationary panic is in our future. You can find a recent report from him in the Free Trading Resource (Reports & Articles).

As the Fed Funds futures indicated, we got a 50 basis point cut. And since this was what the market expected and had come to rally for ahead of time, we got a muted response. I wrote early this morning:

“If we do get exactly 50 basis points, we could flail around and end the day unchanged for the most part.”

The text of the Fed announcement hints that there will be more rate cuts to come:

Today’s policy action, combined with those taken earlier, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will continue to assess the effects of financial and other developments on economic prospects and will act in a timely manner as needed to address those risks.

The Fed’s scramble to lower interest rates is much more than just a preoccupation with the housing market or the stock market slide or the liquidity crunch or the multi-billion dollar Societe Generale fraud or any other one variable. It is about the US economy’s inevitable slide into a recession.

With the interconnectedness of world economies, you can bet this will quickly seep into Europe and Asia. I’m already hearing from friends and family overseas that business is slow.

Here’s an updated graph from Google Trends:

Notice how the first blip coincides with the Asian “flu” correction in the spring of 2007. But now its off the charts!