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Thursday February 16, 2012
February warning?
by Sy Harding, editor Street Smart Report One seasonal pattern to consider is the tendency for the market to run into trouble in February. Indeed, Februaries have been particularly troublesome since 1999, falling in 8 of those 13 years, with an average decline of 4.3% in the down years. But even that doesn’t tell the whole story. Even in years when February was an up-month it was still often involved in a period of market trouble. For example, February was a positive month in each of the last two years, with the S&P 500 up 3.1% for February in 2010, and up 3.4% in 2011. However, in 2010 the weakness came early, a 3-week market correction of 7.9% beginning January 19 and ending February 8. Last year the weakness arrived late, with a four-week 6.2% correction beginning February 18 and ending March 16. 
So far this year, it’s been unusually smooth sailing. But there are now yellow flags waving, indicating the need to be alert. They include that the extra exuberance of the best January in 15 years has the market quite overbought technically above key moving averages. Then there is the high level of optimism and bullishness among investors. It’s no secret that investor sentiment tends to be very bearish at market lows and then gradually improve until it reaches extreme bullishness by the time rallies may be ready to top out. The latest poll by the American Association of Individual Investors showed a jump to 51.6% bullish and only 20.2% bearish. Historically, the poll is considered to be in its warning area when bullishness reaches above 50% and bearishness drops below 20%. We also have to consider the high level of selling by corporate insiders. In November as the market plunged, insiders began buying heavily, at a ratio of 100 shares bought for every 80 sold according to Argus Research. But now insiders are selling at a heavy pace, a ratio of almost 600 shares sold for every 100 bought. None of these condition -- an overbought market technically, a high level of bullish investor sentiment, or a high level of insider selling -- can trigger a sell signal. They can only warn a top could potentially be near. But the combination of those conditions in February should be enough to have investors alert, and at least cautious about wading further into the market for the time being. Learn more about this financial newsletter at Sy Harding's Street Smart Report. 
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