Saturday, December 25, 2010

Wednesday, December 22, 2010

Bullish Sentiment at Nosebleed Levels

The Investor's Intelligence Survey today showed 58.8% bulls which is the highest since the Oct 2007 bull market peak. Throughout the past decade most bullish % peaks have been around 60 to 63% with moves to 60 or above occurring at some major peaks.

Equity put/call ratios remain low and indicate complacency in the options market. However the last few days the OEX "smart money" put/call ratio has been quite high indicating that these traders are hedging here.

It seems most likely that the market tops soon or drifts modestly higher over the next 1-2 weeks to be followed by a sharp decline to the November lows at a minimum. But over the intermediate term based off of the sentiment and historical closest fit precedents, the correction will likely be longer and more complex than that.

The S&P 500 is now just under a resistance line noted in a prior post. Certainly it seems a good time to lighten on stock exposure. Based on the daily chart of bonds and the stock/bond ratio I thinks bonds are oversold and should put in some form of rally, though I only expect it to be a bear market rally in a long term downtrend.

Tuesday, December 21, 2010

Multiple Time Frame Bearish Divergence

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This chart of SPY is a 90 minute chart. It shows a significant bearish divergence on this time frame as the market has pushed above last week's highs.

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This chart is the daily chart of SPY. It shows a very nice (basically picture perfect at this point) bearish divergence on this time frame. In addition the weekly chart shows a MACD bearish divergence with the April highs at this point. So there are multiple time frames suggesting a pullback from here.

The daily chart RSI also touched overbought today suggesting we may see things pullback from here. Now generally around the Holidays volume tails off and prices tend to trend up. So maybe now isn't the perfect time for a pullback, but the stage is set.

If we see a classic reversal candlestick, then that could be a confirmation of topping action.

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This is probably the most important thing to watch right now. The QQQQ (Nasdaq 100) is 17 cents from matching the 2007 high. Ideally before any significant decline we should see it break above that high at least briefly. This could create a double top situation. On the other hand, if the market continues up after exceeding that high, then that would be a typical bullish signal. I will update if/when we break the highs to gauge the legitimacy of the breakout.

Sunday, December 12, 2010

Excessively Optimistic Options Data

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Across the board options data is showing extremely high bullish sentiment. The charts above show it from a few angles. The options speculation index shows total bullish bets versus bearish bets. The bullish bets are swamping the bearish bets more than any other point since near the "tech bubble" highs.

The detrended equity put call ratio shows that the shorter term average of put call ratios is much more bullish than the longer term. This data tends to revert to a mean of zero, and if extremes reach 20% from that, it is often a turning point in the markets. The 5 day average of the equity put/call ratio is lower than any time since April of this year, and it is not too far off from that.

The ISE equity call/put ratio rocketed up Friday. This puts it at an extreme level right at the range where it peaked in April of this year. Also the 10 day average is higher than it has been in quite a while. All these suggest that the bullish sentiment is at an extreme and is likely to back off over the intermediate term.

Click on Chart to Enlarge

I noted in early November that I thought the US Dollar index would probably have a false trendline breakdown, and then start to rally. That is precisely what happened. Now is has backed off a bit as the market has rallied the last couple weeks. But the strength of the move down in the USD is weak compared to what it typically has been when stocks are uptrending. I think this is another clue that stocks are topping here and the USD is in a continuing uptrend.

Related to this, there are several commodities that I think are in very good position to short. Cotton being one (BAL is an etf to take advantage of moves in cotton). The grains also look nice to short, with etf's like DBA offering an equity opportunity to take advantage of that. Gold has put in a bearish candlestick pattern at a short-term double top with divergent technicals. Also oil looks like it may have topped as well or is in the process.

In any case, my suggestion is that commodities will back off significantly in the months ahead, and the USD will likely continue up for a while. I would also expect stocks to fall in the months ahead.

Click on Chart to Enlarge

This chart shows the beautiful bearish divergence in the SPY etf daily chart. A top should form soon if the divergence is to remain. Also, not shown is that there is a bearish divergence on the weekly RSI and MACD of the major indexes as well.

One thing that may argue for some further upside in stocks is that the QQQQ is only a couple percent shy of its Oct 2007 bull market high. It may be ideal to see it double top above that level before putting in any meaningful decline. Related to this, the Rydex data is currently showing a preference for Nasdaq 100 funds that is 34 to 1 bull to bear ratio. That is near levels at the tech bubble high. So we have in the last couple months seen an historic build up of short Nasdaq 100 futures positions by the "smart money" and a huge build up of longs in the "dumb money" Rydex funds. Longer term this is ostensibly negative for stocks.

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Bonds are oversold on an intermediate term technical basis. There is a nice bullish divergence on the daily chart of TLT. The inverse correlation is still holding between stocks and bonds. If bonds turn up, then stocks probably will move down. I want to reiterate that I think it most likely that we have seen longer term highs in long term bonds though. So I am not suggesting that this is a great investment buying opportunity, though it may be a nice trading opportunity.

Saturday, December 11, 2010

Quick Note

I will probably get a post up this weekend, but in short everything is set for an intermediate term decline. Sentiment is running excessively bullish and a nice technical bearish divergence exists on the daily chart. Other than the winter of 2006, set-ups like this have been on the money for nice intermediate term declines.