Monday, August 8, 2011

Sentiment Indicators turn Bearish

Sentiment Indicators turn Bearish:   
To All readers of the Socially Responsible Investing website:

While I advocate always being invested in the market (see Background Information below),  my Sentiment Indicators  said we're in a very HIGH RISK environment.  They turned bearish during April/May 2011, though I hadn't the time to update.  Will promise to report to you as soon as they turn Bullish.

Remember, the higher the Indicator, the more Bullish.  Indicator levels below 3.6 are considered Bearish.

Note other indicators of Technical Analysis also turned Bearish including the well known Head & Shoulders' Pattern and Dow Theory.

At the present time (early August '11) it's likely there will be a short-term bounce-back.  However, a new Bull Market is not likely to ensue until there's a resolution to the ever expanding Euro-Crises.

Please see chart below (double-click to enlarge):

As a long-term investor, I believe the time for Socially Responsible Investing is now…right NOW.  Long-term investors are not concerned over the current level of the stock market and whether the Market’s going to rise or fall the next day.

I propose investors be “fully invested” in equities most of the time.  Being “fully-invested” is different for different people depending on age, risk tolerance, etc.  As a Heuristic, I suggest being 75% long equities as a “base-case” level.  The remainder would be invested in bonds, real-estate, hard assets, and alternative/exotic investments (e.g., natural gas, platinum, rare-earth anyone?).

With that being said, there are certain times that are better to invest in the market.  Rather than choosing tops and bottoms based on certain fundamental criteria (e.g. price to earnings ratio), I have developed two Market Timing Indicators.  These indicators help me maintain objectivity with regards to my investment positions, as I have no influence on them.  They were designed during late 1992 and have been updated weekly since.

The two major indicators are:

1.    Sentiment:  based on human behavior, and supported by theories backed by Behavioral Finance. 

2.    Technical:  which measures market breadth, or underlying strength in the broad market.  This indicator was Neutral-Slightly Negative as of 1/2011.

These indicators are used to obtain my Portfolio's Investment Position.  Note, they do not know, or represent market levels.  They are measures of perceived risk, especially the Sentiment Indicators.  I have often taken mental notes of how everyone seems to clamor to buy things when their expected rate of returns are minimal compared to their inherent risks. 

This website will include three simple colored (traffic) signals.  Green for “Buy” (i.e, low-risk levels) which means allocate your portfolio to a fully-invested equity position.  For me, that’s about 75-80% invested, but it could be lower for a more-risk adverse, or retired individual.  Yellow, means caution, risk levels rising.  Red means “High-Risk”; investors should reduce their investment positions to conservative levels perhaps 30-40% equity.  The remainder could be in treasuries, gold, high-grade corporate bonds, etc.

Feel free to contact me for additional clarity or to answer other questions.

Helios and Matheson: I’ve seen this movie before, and it ends badly !

Summary:   My career as a penny-stock equity analyst gives a unique perspective to the issuer  HMNY is insolvent and the likeli...