Sentiment Outlook for Stocks

11/05/2012 10:00 am EST

Focus: STOCKS

Jeffrey Hirsch

Editor-in-Chief, The Stock Trader's Almanac and Almanac Investor

Jeffrey Hirsch, editor of Stock Trader's Almanac, reviews some of the most popular sentiment measures as we head into the election, and shares his top five stock picks.

Getting sentimental with Jeff Hirsch. Jeff, you wanted to talk about some sentiment indicators that you’ve been looking at recently, especially some that you saw just being in Chicago on the floor.

Well, I had a nice visit to the Board of Trade. A friend of mine, Danny Riley (Mr. Top Step) was over there, and he took me around and introduced me to a lot of people. We had some fun standing on top of the top step of the S&P, where there’s still a lot of action going on in there, and actually ducked when somebody yelled an order over to the options pit. So it was a nice experience for me, and, you know, I got to see some things.

But the thing that we’ve been looking at lately one of the contrary sentiment indicators that we watch, the Commitments of Traders report, the COT report, which shows the small speculators, the large speculators, and the commercials. Small specs are notoriously wrong but it depends upon how much they’re indicated there.

So we’re seeing in the big S&P contract the small speculators starting to get more bullish as this rally continues to pick up. When that turns over and gets a little bit more extended, then we get worried and start looking for a top there.

Some of the other sentiment indicators that I also track regularly are the Investment Intelligence percentage of advisors bullish and bearish. And the bulls are just down a little bit, from a 54% to about 51%, but the bears are still up there at about 24.5%. They haven’t thrown in the towel yet, and they seem to rise any time there’s a little bit of dip. So until those bears throw in the towel, we’re not going to get a top, or at least some sort of sizable sell off.

And then put/call, another thing out of Chicago. The equity-only options put/call ratio— I get it out of Barron's all the time, where it’s sort of a weekly smoothing. This is the five-day explanation of it. That’s been middling for a while just above 50, 50/60 ratio for a while, but now it’s starting to pick up a little.

It was 69 last week, so we’re seeing some fear come into the market, which helps push it up a little bit. Until that drops off into there being no puts out there, then I think it’s smart to keep running.

Are there any stocks you like in particular?

There are a few stocks. We teamed up with Jordan Kimmel recently using his Magnet Stocks process, which combines value, growth, and fundamentals. There are a few midcaps that I think are good right now. They’re top-scoring in our $500 million to $3 billion mark. They all have good growth and margin and accelerating growth.

So it’s Taro Pharmaceuticals (TARO), which is an Israeli outfit, a subsidiary of Sun Pharmaceuticals, and they do prescription and over-the-counter drugs. That’s one we’re looking at right now.

Blucora (BCOR) is in search. They do Dogpile and MetaCrawler, that’s the second highest scoring magnet stock. And then we have Primero Mining (PPP), which is sort of in the specialty mining area, and they have good numbers also.

Then Cedar Fair (FUN). They’re an amusement park and water park company, and they’ve got some great growth numbers also. The last one is Calumet Specialty (CLMT). They do fuel and food oil products.

So those are the five top scoring magnet stocks. We’re looking to get into those probably on some pullbacks. They’re really high-scoring stocks with value, growth, and momentum.

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