I think the best clue right now is the divergence with breadth. People have pointed out the underperformance of equal-weight indexes, the rolling over of the advance-decline, and the rise in new lows. Some of it is seasonal due to the end of October tax loss selling. We're now getting a bounce in the beaten-down sectors. If it resumes in November or January, I think a garden-variety decline of 7-15 percent is in process.
Posted 02 November 2017 - 09:44 AM
The high ratio of bulls to bears is a cautionary signal, but as Mark says must be taken in context. Real money positioning for now, does not quite measure up to the bullishness of the newsletter writers. Obviously that can change and doesn't have to take a long time, but for now is not flashing warning signals to the same degree. One indicator I mentioned in March was the Commitment of Traders report. In March commercials got heavily short , and we did get a 2.9% correction, but they quickly reversed positions in both the S&P and Nasdaq. For now they haven't built up a short position, so they have been correctly positioned since April. I'd expect that to change before real trouble. I'll mention if it does.
Posted 02 November 2017 - 11:08 AM
I went back and checked what people were doing during the Jan/Feb 2010 correction. Some people bought the dip half way
down and shorted at the first significant low.
Posted 02 November 2017 - 11:11 AM
Everything needs context. The way I used to trade, I'd have considered II to be fulfilling one of my preconditions for an IT correction. But, I've learned that you need more than one indicator for the sentiment that you're measuring to have confidence and you need technical confirmation as well. We definitely don't have the latter yet.
NAAIM measures essentially the same type (professional market timer) of sentiment, except that it measures real money not opinion. NAAIM is at exposure levels that CAN set up a correction, but it's far away from levels that show real acceptance of the rally.
Sentiment is the context. You need technical confirmation now.
One other really important context to keep in mind is that II was in Sell territory for most of (including the beginning of) this entire rally. That's a pretty good reason reduce the importance you place on this indicator. At least for now.
That's not true. You need to look at Ed Yardeni's charts. Bull/Bear ratio was at around 3 when the Trump rally started. It has moved to 4.41 over the last 6 months. It appears, you guys are not paying attention.
I'm not unaware of the excessive reading currently, but the fact of the matter, at least the way I look at II (Ratio >3 and Bullish and Bearish percentages above and below their threshold lines), is that it has been in Sell territory a majority of the rally.
I would also point out that if you think this market is similar to 1987 (I don't, for a number of reasons, but, I could be wrong), then when we hit similarly Bullish readings on II, the market proceeded to rally for months.
You've forced me to revisit my data, which is good, but at the end of the day, my only conclusion is that Sentiment leaves a bit to be desired when it comes to picking tops and almost always, it tends to be early.
My feeling here is that we are seeing something historic as far as the market and liquidity are concerned and, as a result, we are probably going to have to see some historic sentiment readings before the end. NAAIM got some pretty Bulled up readings over a month ago, but I think it gets more so, and then, after that, we'll rally further still into that big top.
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Posted 02 November 2017 - 11:19 AM
No i am not saying this is like 87. I am saying the sentiment picture is like 87, not the technical picture (not even close). If the technicals deteriorate then we could have a similar outcome.
It's not the knowing that is difficult, but the doing.