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.

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