We’re all very excited about the new highs being put in by the S&P 500 over 2016. After all, the S&P 500 was stuck in a trading range with a cap at around 2130 for over a year, until the breakout in July. Heck, even the TSX 300– which is still underwater from its old highs, has been showing some life this year. But there are some questions that I, as a technical analyst, have to wonder about as I watch the markets march forward.
My first question is – if the S&P 500 is showing us that markets are in great shape, why doesn’t the broader NYSE composite back that index up? At the time of writing, the NYSE index is still a good 3.5% below its May 2015 highs. In other words, despite the S&P 500 composite busting out of its 1 year + long ceiling, the broader market index has not done so. The NYSE holds a wider exposure to different market caps and a different weighting in sectors and individual stocks – perhaps it is telling us this market is being driven mainly by larger capped stocks? The chart of the iShares Russell 2000 Small Capped index tells us that this is indeed a factor. It too is struggling to approach, let alone break the old highs.
Part and parcel with broad participation is volume. And you can see on these charts that volume has been steadily declining for the entire year. I recently read a couple of commentaries noting the low volume of the summer. Low volume is typical in July and August – so my concern is not so much with the summers volume. I’m concerned about a rising market on low participation. So who is it that is participating and driving markets up? The next chart might help answer that question.
Discrepancy between smart and dumb money confidence
Sometimes a reading of “Smart” (institutional traders, pension managers, commercial hedgers) confidence shows less conviction than “Dumb” (retail money, small traders, mutual fund buyers). It doesn’t necessarily tell us much when one group is more bullish than the other—except in the case of extremes. When that level gets extremely bullish while, simultaneously the other gets extremely bearish – there is usually a market shift about to happen. Note on the chart below, courtesy of sentimentrader.com, we can see a level of extreme optimism by Dumb money with coinciding extreme pessimism by Smart money – as evidenced by their very significant breaching of the respective horizontal indicator lines. My question – why has this extreme level lasted so long without corresponding market downside? I wonder if, as David Wilcox sang in his hit song Bad Apple, “The longer we wait the worse its gonna taste”?
We moved to about 28% cash last week, plus a 5% hedge position (bringing us closer to 38% cash equivalent) in light of these questions.
Keith on BNN this Wednesday August 24, 2016 at 1:00pm
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