Dumb Money Sold in May and Went Away

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Led by near suicidal sentiment among the gold 'community', the broad markets recently embarked on a southerly course as well, culminating with 'dumb money' sentiment at very bearish levels in technology, energy, financials, industrials and on out to commodities. 

Aggregate 'smart/dumb' confidence courtesy sentimentrader.com









The last time sentiment was in such a compelling (contrarian) bullish structure was after the damage inflicted upon markets by last summer's acute phase of the euro crisis.  Here I will interject that I subscribe to Sentimentrader.com to give NFTRH a real time edge on the market's sentiment structure and highly recommend their service.

It is important to realize that when commodities like crude oil and copper are weak the last thing on the public's collective mind is inflation.  That is just the way that powerful entities – entities that have been roundly criticized for their chronic inflationary policies – want it in order to promote the next inflation.  In other words, the public is finally shutting up about austerity and gas prices.

The red arrow on the monthly chart of the 30 year Treasury yield indicates the last time that the public was highly alarmed about inflation.  The terminal moment was when the 'bond king' himself, Bill Gross, was widely publicized to have gone short the 30 year (or long this yield).  He called the top in interest rates and in inflationary hysterics.

Now, aided by Federal Reserve buying of the bond, we have come to the opposite state, with deflationary fears in the air and anxiety at a maximum.  The stage is set.

It is a US presidential election year after all.  A Democrat reelection year at that.








Here is the seasonal pattern for the S&P 500 during Democrat reelection years courtesy of McClellan Financial, a market intelligence service to which I have recently subscribed to give NFTRH another edge in its own market management.  The graph was generated as the SPX was beginning its hard down of the last week or so. 

If the pattern holds true in 2012, it will blend nicely with NFTRH's ongoing theme of 'i2k12' (inflationary 2012), which would be born of a deflationary phase like the one that threatens to come to the fore today. 

Think about the election year pattern, think about how wildly bearish sentiment has become, think about the market's need to shake out the dumb money prior to rising and most of all think about how policy makers need to be perceived as doers of good; as part of a solution, as opposed to chronic purveyors of an inflationary regime that has been in force most intensely since 2000.








The S&P 500 has not yet declined quite to the level anticipated by this chart from NFTRH, which we have been using to gauge first a loss of important support at 1360 and then, anticipated major support (the black highlighted zone shows the range) that would be the base from which 'i2k12' could get going.  

I am not personally interested in buying  the S&P 500, but am watching emerging markets, emerging market 'income' funds, big US technology and energy for possible positioning now that NFTRH is fully stocked in the gold sector.

There are no guarantees in highly gamed markets dependent upon being spoon fed by policy makers who continually play a game of trying to fool the public.  But if the election year pattern holds true and if the Fed so chooses to exercise a renewed imperative to inflate from a public that no longer sees inflation as its primary fear, the second half of 2012 could be largely bullish… for the markets and for the president's reelection chances.