Go with the flows

The best sentiment indicator as of late has been equity inflows. Despite how crazy market action has been with all these wild swings, if any rally was not accompanied by significant inflows it wouldn't be in danger of collapsing....you could still see big dips but not a complete retracement. The only 2 times since the August crash that we saw a spike in inflows were in mid September and late October, both of which marked significant tops and were followed by losses of about 120 points on the SPX.  Since the bottom in late November, despite how erratic and gap happy the rebound has been (which tells me ultimately it's gonna fail) it has attracted negligible inflows so far...in fact, on a net basis, there has been outflows since the November low. The lack of inflows along with other sentiment indicators has made me avoid the short side.

The other sentiment indicators I'm talking about are AAII and NAAIM.  AAII currently shows only a modest ratio of 1.2 bulls vs bears and NAAIM shows that active managers have only about 37% long exposure. Those are not the sort of statistics that make me salivate towards playing the short side....they both suggest there's more room for bullishness to rise before reaching the danger zone. One thing though that is indicating complacency is the VIX. At 21, it's pretty damn low considering the market volatility these past several weeks, not to mention all the fundamental issues out there that have yet been resolved. 

The VIX has hit one of my bear bet triggers. The other triggers would be AAII sentiment showing about 2:1 bulls vs bears, NAAIM at least 65% exposed long and of course, a spike in inflows. Obviously, there's no law that prohibits the market from tanking big before such stats are reached but from a risk/reward perspective, that's what I need to see to bet along side the bears. If I don't see it, I don't play it. Until then, I'm going to stick with strategy of picking away at some individual names that I can be a strong holder of should I get "caught" and the market does indeed tank big before I believed it was ripe to do so.  

Here's something I read this week that I found interesting. 

Money market funds  brought in $3.2 billion globally last week, extending their longest weekly inflow streak since a 12-week run during the financial crisis at the end of 2008, according to EPFR, a research firm that tracks fund flow data.

When I read things like this it makes me temper my conviction of a big bear market playing out. 

If the rush to safety is rivaling what we saw near the depths of the bear market lows in 2008 (when there was far more chaos and destruction compared to now) it suggests we are closer to a LT bottom then an LT top. And remember when I said back in September how the late night talk show hosts were making fun of the economy...something that I also saw in late 2008. Late 2008 wasn't the final bottom but it was close. 

The above makes me lean towards the thesis that although it appears likely the market will make another run to the lows in the weeks/months to come due to the shitty market action we have been seeing and a few other things, such a run to the lows would end up being the last move down completing the LT bottoming process that began in early August. As always, I will try my very best to be flexible and open minded about how things are going play out. One thing's for sure is that 2012 is going to be yet another interesting year in the market....aren't they all though?

Ok, that's enough stock market talk. When the closing bell rings Friday, turn off your computer and forget about the market. This is a time for family, friends and food! Remember how you felt as a kid this time of year? Try feeling that same way if you can. Don't be a miserable SOB.  I know this sounds cheezy....have a positive attitude and be grateful to be alive and in good health. We all want to make the best out of our life and that's not possible if you're negative or apathetic.  And remember, to be really successful you have to consistently do things most people don't do.

Merry Christmas!