There seems to be a bit of a conflict between the extremes within bullish and bearish technical signals on the US markets right now.
On the one hand, we have a strong trend that is marked by the consolidation breakout by the SPX (and the DJIA) last month. The market is above its vital 200 day moving average (40 weeks). I will note that its more than 13% ahead of that trend indicator. I tend to expect a pullback if the market is too much more than 10% above its 200 day SMA. Its early yet, but do keep that in mind. Moneyflow (accumulation/distribution- bottom pane) is strong for the SPX. Breadth for the SPX (not shown) via the Cumulative Advance / Decline line is bullish. All of this means that the larger trend is intact, and healthy.
The TSX … not so much. No new high…yet. We shall see.
Back to the SPX…Below is a chart of one side of the “Smart Money/ Dumb Money” indicator that I use within my Bear-o-meter compilation, last reported on Dec. 2nd.
What you are looking at below is sentimentraders “Dumb Money only” indicator. It tracks the investor confidence of retail investors…. mutual fund equity flow, ETF equity flow, small equity trades/ small options trades. These investors are notoriously wrong at market extremes. You’ll notice the indicator is well above the horizontal red (too optimistic) line. Sentimentrader back tested the indicator using historical data when it hit the same level as its hit recently. I’ve circled on the chart how the S&P 500 fared over various timeframes, per their research. You’ll want to study the “win rate” percentages at the bottom of my highlighted area. Note that the market can usually rise under similar sentiment conditions for about a month. Its at the 2-6 month period where the proverbial poop hits the fan. Their data shows literally no positive periods of performance under the current condition in the 3 to 6 month follow-ups. Scary.
Put/ call ratio
I noted on the December Bear-o-meter blog that the CBOE put to call ratio was just barely above a bearish signal. Well, here we are a week later, and its gone bearish. See below. Keep in mind that this is a pretty whippy indicator, so it changes its mind in a hurry. Still, its been below the complacency line quite often lately. Not a great sign.
The VIX is also reaching my first-level “risk” alert status. The chart below shows us that option premiums are shrinking – this is a sign of complacency. Although a deep sell signal is hit only if the VIX approaches 12 or below in my way of doing things, the VIX can indicate a temporarily overbought market when it nears 20. That’s where it roughly resides now (gold horizontal line on chart).
Finally, we have some momentum studies on the weekly chart getting close to an overbought sell signal. See the chart at the top of this blog. They are not quite there yet, and would need to hook down to complete a sell signal. But, they are getting there.
Methinks we are perhaps looking at a few more days of good times before some level of pullback occurs. The 3-6 month outlook via the dumb money indicator is a bit worrisome. But, its just one indicator without too many historic data points to draw conclusions, so its hard to draw a firm outlook from it. Also, lets not forget the “unprecedented” times we live in. With most historic analytical studies, signals were generated in an environment where investors could hide in cash or bonds for extended periods while earning some interest. With rates as they are, “TINA” (There Is No Alternative to stocks) pushes money back into equities faster after market corrections. So, my view remains that corrections should be bought until a major trend indicator (200 day SMA, lower low & high on the weekly chart) signals otherwise. Perhaps some type of neartermed correction is coming soon. Again, we shall see.
I’m in the midst of writing my yearly rant blog, and hope to publish it just before Christmas. This year I’m having a blast writing it. I’m proposing a new & unique tax system for Canada. I’m sure that my proposal will strike anyone with some financial sense as interesting. I’m also sure that it will never be adapted. Stay tuned for that.