Update on Nasdaq and Newsletter Sentiment: They're High

Two more extremes in sentiment published today.

1. SentimenTrader and Hulbert measure Nasdaq investor bullishness at the highest level in 8 years. 
2. MarketVane measure newsletter bullishness at the same extreme as prior peaks in $SPX in March and September 2012, as well as the peak in June 2007.

Nasdaq Negative in February Every Post-Election Year Since 1985

Stock Trader's Almanac has this to say about February:

1. Since 1950, January $SPX gains of 2% or more corrected or consolidated in February 67.9% of the time. 
2. In the 19 years that $SPX gained 4% or more in January, 68.4% of the time it declined or finished flat (less than 1% gain) in February.
3. February’s post-election year performance since 1950 is miserable, ranking dead last for DJIA, $SPX, NASDAQ, Russell 1000 and Russell 2000. 
4. NASDAQ has not posted a post-election year February gain since 1985.

Sentiment is Heady and Out of Sync With Macro

National Association of Active Investment Managers (NAAIM) went 104% long equities this week. This is the highest percentage long in the 7 year history of their survey.

Over 80% is generally overly bullish and above 90% was last seen run to the 2007 SPX top. Moreover, the most bearish manager in the survey is now 60% net long equities, the most bullish position in the history of the survey for the most bearish manager. 

What happens next? Most likely is a pause or pullback. Not a major top. Yet. You should notice with all sentiment surveys that bullish (or bearish) extremes lead price. They normally begin to decline as price heads higher (divergence). A decline in sentiment as price heads higher should be a watch out. For now, note one more sign of exuberance.

Weekly Market Summary

Our overall market view remains positive. There were no changes in our model this week: trend and breadth remain strong while sentiment and macro expectations remain headwinds. As we have said, trend and breadth are the main drivers; the others are headwinds, tailwinds and tea leaves.

Trend: the 10th week out of the last 11, a majority of sectors and indices close >13ema. This week: all 4 indices and 9 of 9 sectors.

February Fed Purchases of $44 billion Planned

The Fed Pomo Schedule is out (link). A strong and steady inflow of $44 billion is planned (versus $45 billion in January). This is a liquidity tailwind for the market that should support the trend, all other things being equal.

February Has Tended to Be Flat for $DJIA

The strongest 6 months are from October to April. Within this period, the strongest three month stretch is November-January; the stretch we just finished. February tends to be the pause month - flat on average - before better seasonality in March and April.

AAII Bullish Declines From 52% - Watch the Divergence

American Association of Individual Investors (AAII) bulls hit 52% a week ago (January 25). Today, the number has declined to 48%. The main point is to say that this is now a headwind for prices, not necessarily an imminent turning point. Two other points:

Risk/Reward in $SPX Based on Citi Economic Surprise Index

According to JPM, the last 7 times that the Citigroup Economic Surprise Index (CESI) went negative, over the next 3 months, the $SPX had average upside of just 1% versus an average downside of 8%. In other words, based on that indicator alone, your risk/reward here is 8:1 down. Note that CESI went negative last week (January 25). 

1 Year Forward PE Ratio, 2003-Present

Since 2005, the $SPX has "comfortably" traded between a 12 month forward PE of 12-15 times. Below 12 has been an extreme reached in early 2009, mid-2010 and October 2011. Above 15 times marked the top in 2007 and April 2010. Over the last 10 years, the average has been 14.2.

Keep an eye on this. At SPX 1500 and assuming consensus $112 in FY13 EPS, the $SPX is trading at 13.3 times.