ONE last post on credit cycles, this one on market sentiment indicators and their relationship to broader credit cycles. ...


So credit cycles are also associated with extremes in market sentiment, and these are strongly reflected in standard market sentiment indicators. Two of my favorites are (i) the Bullish % Index, and (ii) the % stocks trading above the 50 day moving average.


Here's the a 12-year chart of the Bullish % Index for the S&P, and the % stocks trading above the 50 day MA for the NYSE. Note that both these charts are current to spring 2012. Note how apparent the credit cycle lows are for the market bottoms in fall 2002 and fall 2008. Note also how the interim lows in the current credit cycle are for the spring of 2010 and the fall of 2011. These extremes in bearish sentiment represent fantastic entry points for deploying new capital, but particularly so for the credit cycle lows at the bottoms in 2002 and 2008.


It is nearly a certainty IMO that we will see a credit cycle low in 2013 or 2014 that will produce a buying opportunity on par, or better, than the lows of 2002 and 2008.


Stockcharts also maintains Bullish % Index for the TSX composite - the symbol is $BPTSE.