Welcome to Profit Confidential • Monday, May 21, 2012 Market sentiment is the general view of investors towards the market. This is the combined view of all investors at any one time. Since this is not static but always changing, market sentiment is usually seen in three general categories: extremely optimistic (bullish); extremely pessimistic (bearish); and neutral or equal in number of optimists and pessimists. The view of market participants can be based on either fundamental or technical reasons. Market sentiment is seen as moving the main indices, which will push individual stocks in its wake. For example, a company might not be a great stock, but if the market sentiment for the overall index is extremely bullish, this optimism will push up the price of most if not all stocks. Many view extreme market sentiment readings as a contrary indicator, when most people are bullish (optimistic), this is close to a short-term top and vice versa.
Posted by Sasha Cekerevac in stock market on May 9th, 2012  The recent sale of Edvard Munch’s “The Scream” for almost $120 million is a clear indication of the market sentiment regarding hard assets. The sale took place at Sotheby’s Holding, Inc. (NYSE/BID) auction house, one of a few firms whose investment strategy is to auction off high-end art and antiquities.
This sale was the highest priced auction sale in history, showing that the market sentiment for rare assets is still very high. The reason why the price went so high is that the collector assigned the value of the art as far more than paper money. When market sentiment gets to the point where the actual paper money is worth less than hard assets, this is a warning sign to everyone. Yes, this art is only for the super-rich, but if they’re willing to trade a paper money for a painting, this tells me that paper money is becoming more worthless every day. The market sentiment of the super-rich is not to be ignored. If their market sentiment indicates that money printing is causing the devaluation of the dollar, then I would suggest following in their steps and protecting your assets. While we can’t all participate in the high-end art market, regardless of our market sentiment towards paper money, one way is to look for firms the corporate profits of which will benefit from this market sentiment. The sale took place at Sotheby’s auction house, the main publicly traded firm available for investors who believe that the market sentiment of hard asset values will continue to go up. On Thursday, May 10, 2012, the firm will announce quarterly corporate profits. Even with this sale and the profit generated, I think it will miss corporate profits. Therefore, I would not invest in the stock at this point. The stock is coming off two straight quarters in which there was a decline in revenue and, even though the high-end art is selling, a lot of the mid-to low-end art is not. Partially I think this is a sign that, even though the market sentiment for many is to trade paper money for assets, people don’t have a lot of disposable cash left to acquire such assets. 
Chart courtesy of www.StockCharts.com Sotheby’s stock does trade at a book value of almost three times, quite high for a firm that isn’t growing corporate profits at a fast pace. While profit margins are very healthy at over 20%, quarterly revenue declines recently have worried me. Looking at the weekly stock price after a big run-up from 2009 to 2011, the stock has pulled back and retraced into several Fibonacci levels. This area will be of significant resistance and impede further moves up, as market sentiment is now essentially flat; neither bullish nor bearish. 
Chart courtesy of www.StockCharts.com Looking at the shorter term, you’ll notice two horizontal lines that have locked Sotheby’s stock into a trading range. With so many reversals along the trading range, it’s not possible to predict which way will break out, only that whichever side the stock does break out, it will be significant and will most likely continue in that direction. News this week about the company’s quarterly earnings might be the catalyst for the stock to break the range and for a change in market sentiment. With a series of quarterly revenue misses, I am doubtful Sotheby’s can beat estimates. Looking at the chart, there aren’t that many bullish signs to me. If somebody knows something about the company’s corporate profits, they’re not buying ahead of the news. Investors are sitting on their hands and I would recommend you do the same.
Posted by Sasha Cekerevac in stock market on April 9th, 2012  With the election looming over the economy, more industries are being tormented by inaction and political bickering. The market sentiment is becoming increasingly frustrated due to the lack of a stable regulatory environment. This instability makes it very difficult to determine a long-term investment strategy. After all, how can you forecast corporate earnings if you don’t know what the politicians will do in a few months?
One sector that is warning of huge problems and a hit to corporate earnings is the military. While I wrote about this topic briefly over a month ago in the article Deep Budget Cuts to Hurt this Sector, we just heard from the Pentagon itself that, unless the politicians can strike a deal to reduce the budget deficit, the automatic cuts are going to be very deep and firms need to start preparing for hits to their corporate earnings as a real possibility. Corporate earnings of firms that supply military equipment are at the mercy of politicians and that can keep someone awake at night. To define an investment strategy based on the number of votes this fall is extremely difficult. This is one reason that leaders of defense firms are speaking up and making politicians aware that the job cuts and plant closures will be very severe. Before we even get to the budget cuts, many companies are worried that the Pentagon is withholding the making of any new decisions and purchases ahead of this event. This will certainly hurt corporate earnings on the margin, especially for small firms whose primary customer is the Pentagon. Inaction and a lack of visibility for corporate earnings certainly won’t improve the market sentiment in this sector. Unless politicians vote to override the automatic cuts, the defense budget is scheduled for an automatic reduction of $50.0 billion, which will hurt corporate earnings throughout this sector. Out of the $531 billion currently allotted to defense, the cuts equate to approximately 10%. This is a huge amount, especially for an economy that is barely growing at all. Roughly one million people work in this industry. Aerospace Industries Association estimates that the defense sector, including primary companies and suppliers, would lose approximately 350,000 jobs, as companies try to retain their corporate earnings. It is difficult to make an investment strategy when so many people are going to be hit by these cuts, if they don’t get overridden. One of the bigger suppliers is Lockheed Martin Corporation (NYSE/LMT). This is a big firm and it certainly won’t be disappearing, but, after the huge run-up since the fall of 2011 from $66.00 to $91.00 currently, I would certainly be taking profits off the table. The firm has a very high level of debt/equity and the firm is relying heavily on the “F-35” jet fighter. There have even been a few cracks on the jet fighter front, as Canada might not be purchasing $25.0 billion worth of planes. The country’s auditor general stated that the purchase was conducted without fair competition and the costs are too high. With austerity and budget cuts in vogue around the world, selling such a high-priced plane might be more difficult than expected. If the market sentiment is expecting a massive move up in corporate earnings for Lockheed, combining canceled sales with massive defense budget cuts and the stock is being set up for a fall. The key to a solid investment strategy is moving one way when the market sentiment is still moving the other way. Defense stocks have done extremely well and I’m not advocating shorting them, as there is too much uncertainty regarding corporate earnings in every direction. I think that’s the key; with this much uncertainty, developing an investment strategy will be extremely difficult when you have to rely on politicians to do the right thing. They will pander to their constituents, instead of doing what’s right for the entire nation. The market sentiment will soon shift, I believe, as this uncertainty becomes more pronounced and corporate earnings will be hurt until more clarity is evident.
Posted by Sasha Cekerevac in stock market on March 23rd, 2012  There is no doubt that Caterpillar Inc. (NYSE/CAT) has had a tremendous run since the fall. From a low of $67.54 in October to a recent high just over $116.00, the market sentiment has turned completely around. There are very few big firms that are capable of such a shift in market sentiment, which makes predicting markets that much more difficult.
Some research indicates to me that perhaps the stock is priced to perfection at current levels. Once market sentiment goes too far, either pessimistic or optimistic, this is when an investor can generate profits. Market sentiment always swings back and forth on a pendulum. The key is to wait patiently for the right time. With quarterly earnings due out for Caterpillar on April 25, we can take a look at some possible scenarios and what the recent information may mean for the market overall. When predicting markets, try to gauge the underlying business model of the company and then see how that stacks up with the market sentiment. If there are signs that the business might be slowing down, but market sentiment is too positive, this is the time to be cautious and either take profits or hedge your position. 
Chart courtesy of www.StockCharts.com Research into Caterpillar’s statistics of dealer sales is showing a disturbing trend. Using a three-month rolling average on a year-over-year basis, the number of sales is decreasing, yet it’s still positive. Worldwide, last June, the sales rate was up 45% year-on-year, decreasing almost every month until February when it was at 21%. While that’s still great, stock prices are relative and represent market sentiment. If investors are anticipating growth like last year, this doesn’t appear to be happening. Europe has obviously slowed down, from June’s increase in sales of 53% down to 13% in February. Latin American sales dropped from an increase in June of 51% down to a miniscule six percent in February. Does this mean we’re entering another recession? Not necessarily, as this is just one set of data and the numbers are still positive. However, if we look at this data set in 2008, the numbers kept going down in the previous year until it was fully negative. At that point, the shares traded below $25.00. Clearly, market sentiment went from too optimistic into a state of overly pessimistic. Part of the recent upsurge was pent-up demand for sure, but the question is: what will future estimates be from the company in the next few quarters? Market sentiment is all about expectations. If we’ve already seen a huge build-up from clients, there is the distinct possibility that Caterpillar might guide downwards the market sentiment of investors. This is the key to predicting markets: being one step ahead of the crowd and the change in market sentiment. Note that there has been recent news of continued expansion of Caterpillar in other countries like China. China is another country that is slowing down. Timing is everything when predicting markets and you must understand where the market sentiment is to gauge risks. From where the market is pricing Caterpillar, the risks are pretty high of a potential fall versus only a small gain left. Other companies in the space, such as Terex Corporation (NYSE/TEX), could be hit harder. Terex has a miniscule profit margin of 0.70%, versus 8.19% for Caterpillar.  Chart courtesy of www.StockCharts.com
When predicting markets that might get hit, take the underlying business clues and use them as inputs to figure out where the industry is headed and look for weaker players with a market sentiment that is too optimistic. This is your entry point to do some more research and see if you should hedge your position or even go short. Of course, your own risk parameters must be taken into account before any trade is made.
Posted by George Leong, B.Comm. in stock market on March 9th, 2012  While January was one of the best months for stocks, the upward advance has been stalling, which shouldn’t be a surprise given the rapid move and the reality that the rate of gains cannot be maintained without periodic market adjustments. My technical analysis is that stocks in an uptrend go through periods of ups and downs, which is normal and healthy as long as the subsequent highs and lows are higher on each upward wave. You also need buying conviction on the buy side, which helps to provide the underlying strength.
Small-cap stocks have been impacted the most in the recent weeks, as the Russell 2000 has lost some steam after a strong start to the year and broke below its key 50-day moving average (MA) of 791 on Tuesday, before a slight bounce back above it. My technical analysis shows near-term topping above 800 and a subsequent decline to below its 20-day and 50-day MAs. The index is precariously sitting at the 50-day MA, and failing to hold could see a drop to 750. 
Chart courtesy of www.StockCharts.com The chart resistance has been tough to break based on my technical analysis. The Dow Jones Industrial Average (DJIA) failed to hold at 13,000 after several breaks, and is below its 20-day MA, but holding above its 50-day MA. The chart shows the overextension and the need for a market adjustment, which we may be seeing based on my technical analysis. 
Chart courtesy of www.StockCharts.com But what makes me nervous is the failure of the Dow Jones Transportation Index to follow the DJIA higher, as demonstrated on the chart; it’s a bearish signal based on Dow Theory. The Transport index has breached both its 20-day and 50-day MA, which is near-term bearish according to technical analysis. 
Chart courtesy of www.StockCharts.com As far as the broader market, the S&P 500 broke below its key 1,360 point level on Tuesday and my technical analysis estimates that it will not be easy to surge higher in the near term. The index has been in a sideways channel since October 2011. The bearish divergence between price and volume on up days indicates uneasiness. Take a look at the volume of the NASDAQ. Since the start of the year, there has only been four sessions with over two million shares traded, so this doesn’t reflect on strong confidence in the rally. My technical analysis shows that the lack of strong trading volume is indicating a red flag and the absence of any underlying strength and mass market participation in the rally. The market breadth, representing the advancing and declining stocks on the NASDAQ, has also been on a downtrend as shown on the chart. 
Chart courtesy of www.StockCharts.com While the market sentiment continues to be bullish, with the new-high/new-low ratio displaying a bullish reading in 31 straight sessions dating back to January 17, the recent readings have been weakening, with three straight neutral readings on the NASDAQ. Watch this, as it could indicate a reversal of the market sentiment to neutral, because the chart is showing some flattening based on technical analysis. 
Chart courtesy of www.StockCharts.com I continue to suggest taking some profits off the table. Use put option as hedge protection and write short-term covered call options to generate some premium income should markets stall. In other news, Apple Inc. (NASDAQ/AAPL) just showed off the new “iPad 3” for the world to see and, while it’s better than the previous models, it’s not an earth-shattering change. However, people will still flock to the stores to buy it. Apple is the top stock, while rivals such as Research In Motion Ltd. (NASDAQ/RIMM) are choking in the dust, as I discussed in When the CrackBerry’s No Longer Addictive.
Posted by Sasha Cekerevac in stock market on March 7th, 2012  The overall market, as represented by the S&P 500, has had a tremendous run from the October lows. Even through all of the never-ending struggles with the European crisis, unemployment still high, and a slowing world economy, the S&P 500 has managed to gain over 27%, approximately, over the last six months. That is a tremendous amount over a short period of time and the question I get asked all of the time is: what happens now? I’ll give you two criteria that are showing some warning signs regarding the market sentiment of the S&P 500, both of which are pointing to a market correction.
Recent reports from TrimTabs Investment Research indicate that company executives (insiders) are selling at a brisk pace, almost $13.00 of shares sold for every $1.00 bought. The last time insider selling peaked was back in May of 2011, which was just prior to the summer market correction in the S&P 500. Market sentiment indicators for the S&P 500 don’t always predict a market correction, but, taken together with other indicators, it can raise a big warning flag for investors. While many executives do have set times for selling shares, this much lopsided selling can certainly be indicative of market sentiment overall for the S&P 500. Insiders are telling us through their actions that they are uncertain if current levels in the S&P 500 can be maintained and want to take some profits before a market correction.  Chart courtesy of www.StockCharts.com
This is a daily one-year chart of the S&P 500. You will notice the May peak, which was also a period when insiders were heavy sellers. Of course, no one can predict when a market correction will occur, as many things go into such an event. Last year there was political turmoil as well as environmental disasters. But insiders certainly feel that the market, viewed by the S&P 500, is fully valued; otherwise, they would be buying some shares.  Chart courtesy of www.StockCharts.com
The second indicator that looks at market sentiment in a different manner is the Dow Jones Transportation Index. The reason I highlight this index is for you to compare the recent moves of this index to the S&P 500. You will notice a significant divergence between the two markets in February. The transportation index is a market sentiment indicator that shows the underlying health of the economy. As the economy improves, more goods are shipped to and from stores and supply warehouses. More goods are used, more houses built, more things are built and sold. Conversely, in a bad economy, fewer things are built, shipped and sold. The recent market correction in transports is hinting that there might be more weakness than the S&P 500 is showing us. While this doesn’t mean that a market correction will occur in the S&P 500, as it could be possible for the transportation index to turn up and catch the S&P 500, it certainly should be a warning flag for investors who are heavily long the S&P 500 that a market correction is becoming more possible. One indicator alone can’t predict a market correction in the S&P 500. An investor needs to combine several market sentiment indicators to get a better picture of what the underlying trends are for the S&P 500. These little warnings flags should, at the very least, raise the possibility of a market correction. 
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