Capitalogix Commentary 02/13/09

090212 Fear is Change from Hope Political Cartoon
Did the Government blink?  By that I'm asking whether you think they passed a Stimulus Plan because it was well-considered and the right thing to do … or because we were about to make new market lows and key decision-makers believed that preserving confidence, at any cost, was the move to make?

Last week I said I was more interested in how the Market reacted to the Stimulus Plan, than in the plan itself. Well, the Market sent a pretty strong message this week.  It sold-off and is sitting just above the support areas set by the October and November lows.

The Stimulus Plan is hard for me to understand on several levels.  My sense is that it is work-in-progress and should be looked at only as a first-step to figure-out what it is going to take to get things moving in a positive direction. 

Here is a different (and more fun) explanation that is worth watching.

Here is a direct link to the video on Uncle Jay's site.

Smart Money – Dumb Money Confidence Index.

This chart compares the bets made by small traders (a.k.a. the "Dumb Money"), to those of large commercial hedgers (a.k.a. the "Smart Money").

In practice, Confidence Index readings rarely get below 30% or above 70% (they usually stay between 40% and 60%). When they move outside of those bands, it's time to pay attention.

Even more noteworthy is when there is a wide confidence spread with bearish bets by the Dumb Money and bullish bets by the Smart Money. This type of sentiment
spread only happens a few times a year. The chart below shows that we often get substantial bullish reversals when that happens. 

090213 Sentiment Trader Smart Dumb Confidence Index

I marked those occurrences with Yellow Arrows and marked the corresponding rallies in the S&P 500 using Orange Boxes.  As you can see, this has been a valuable indicator to follow.  So, what is it telling us now?

Conventional trading wisdom says that Crowds are usually wrong at turning-points.  That doesn't mean they are wrong all the time (especially when the Smart Money agrees).  So, perhaps this chart whispers "wait for the edge to get stronger".  I don't like how weak the Smart Money confidence is given all the intervention help the Markets received and how long Market lows have held.

Here Are A Few Of The Business Posts I Found Interesting This Week:

  • Stimulus Battle Has Just Begun … Both Fiscally And Politically. (WP)
  • The Stimulus Plans: Comparison of what the House and Senate Proposed. (WSJ)
  • More Tech Start-Ups Call It Quits. (WSJ & Silicon Alley Insider)
  • Twitter to begin charging brands for commercial use. (Brand Republic)
  • Mark Cuban will fund Entrepreneurs using Open Source Funding. (Macroaxis)
  • Dubai becoming a Ghost-Town.  Economy chases away foreign workers. (Daily Beast)
  • Microsoft Opening Retail Stores.  When did copying Apple ever work for them? (FT)

And, A Little Bit Extra:

  • CIA Director: Top Ten Terror Threats. (National Terror Alert)
  • Are you getting bored of Facebook.  Apparently some are … (Brand Republic)
  • Facebook had over 68 million unique visitors and 1 billion visits last month. (CNet)
  • How AmEx Uses Data-Mining to Monitor Your Credit Card Spending. (NYTimes)
  • Seth Godin's top posts from the past year. Lots of good ideas. (Seth Godin's Blog)
  • Professional Sports Teams are Forced To Get Creative About Selling Tickets. (NYTimes)
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