No replies to this topic

[TTHQ Staff]

Although not spectacular the rally has been steady, consistent and orderly, with orderly in our view the most important. The fact that it has been orderly is a major factor in why a number of shorter-term sentiment measures have remained in bullish territory in spite of a four-week rally that has seen the S&P add nearly 6%. The two indicators that come to mind are the put to call ratios and the Rydex ratios. The Nova to Ursa ratio in fact is still below where it stood in late March and just barely above its level seen at the late May low. The CBOE put to call ratio in mid August did not get as positive as it did in May but in the past four weeks of rally it has moved down only grudgingly and has remained at or near the lower end of bullish nearly the entire rally. While the Nova to Ursa ratio rose sharply during the first four weeks following the May low, this was not the case with the put to call ratio. The 10-day moving average of the CBOE ratio four weeks off the May low had eased from its extreme high but was still bullish. It was not until after the second week of June that the ratio began to drop and drop quickly. The equity only ratio is showing the same pattern as the overall CBOE put to call ratio now as it did following the May rally.

Even though the put to call ratios are virtually no different then they were coming off the May low as they are now keep in mind that in early June the rally was not over. However, the Rydex ratios are far more positive now 5hen in early June. We are on record as saying that wee do not consider the Rydex numbers as being a great indicator and clearly not as good as they were back in the late 1990's. However, this year it has given some very good signals at both the March and June tops as well as the March May and April lows. One big concern continues to come from the volatility indexes as they are at or near the levels seen at the March, early April and late June tops. At the March and June tops both the put to call ratios and the Rydex Nova to Ursa ratio had also moved to bearish or near bearish levels confirming the volatility indexes. The Rydex ratios did not move to bearish levels in early April. We did find it interesting that in early June the volatility indexes had moved to the same levels as in early March and early April. That was when the put to call ratios and the Rydex ratios were still positive. We got a minor correction prior to the last run to the price highs in late June. This does not mean that it has to play out the same way this time but it is a very interesting situation as it is eerily similar at least as it relates to these indicators.

Other measures of sentiment are also similar and most never did reach levels in mid August that were any better than in May. This includes Investors Intelligence, AAII, and Market Vane. The first two were about where they stood in May while the latter remains at bearish levels as it did in May. The one poll that did turn fully bullish was Consensus Inc., which has subsequently moved to neutral. Corporate Insiders meanwhile have again picked up their pace of selling. Although it is not near the extremes witnessed last fall it nonetheless remains near the highest levels of the past 12 years basis the eight-week moving average. Last but not least is our sentiment model. It currently stands at +8, which is borderline neutral. In late May this index hit +10. In respect to this indicator the sentiment picture in mid August was a bit weaker than it was in May.

The rally the past four weeks has moved a number of our momentum indicators to very overbought levels. They are not as overbought as they were in early June when both the McClellan oscillator and our breadth oscillator moved to record levels. Keep in mind that the extreme reading in early June came from a deeply oversold level so the distance traveled to reach those overbought levels was huge. From the August lows they have not traveled nearly as far but one thing that did occur that did not in May was a number of positive divergences. These divergences occurred internally within the post June decline as these indicators reached their nadir in late July but they also showed very positive divergences with their May low. Neither the absolute levels nor the thrust of the move off the August low are not nearly as impressive as they were in early June but the divergences that were lacking in May add a bit of strength to the rally off the August low. We are not sure yet if that is enough to overcome the lower readings off the August low. What we do see is a strong enough surge to be viewed as generating enough positive momentum that is at least short-term bullish and strong enough top suggest that the rally is not over.

We have been approaching this rally, almost from its beginning, as being on par with what we saw in May. The sentiment backdrop at the August low was almost identical to what we saw at the May low and so far the indicators are acting in the same fashion as they did during the May-June rally. In some respects momentum was better as there were very positive divergences in August versus May but in other respects not as good. The indicators at least to this point are showing similar patterns as well although it is far too early to tell whether we have seen peak momentum readings for this rally. We continue to see some signs from the short-term momentum indicators such as the 3-day oscillator that a minor decline may be close at hand. This would also help to take some of the pressure off the volatility indexes and relieve the overbought condition from most all of the primary momentum indicators. We do not see any decline from current levels as more than a minor correction of the post August rally, which we do not see as complete. We remain bullish short-term with a stop of 1105 on the S&P. Medium-term we are neutral but with a positive bias and long-term we are bearish.


Larry Katz
email me at: LK1618@mta.org
website link: www.marketsummaryandforecast.com

Larry Katz serves as both editor and research director of Market Summary and Forecast. Mr. Katz is a full member in the Market Technicians Association and is both one of the founders and the president of their Southern California Chapter. He also serves on the management committee chairing the membership committee. Mr. Katz is a regular contributor to Top advisors corner on America On Line. He is a regular guest on the Business Channel in Los Angeles with Richard Saxton. He has been a quest speaker of the Market Analysts of Southern California (MASC), the Omega users group of Thousand Oaks, Ca. and Orange County, the Market Technicians Association Atlanta Chapter as well as the Foundation for the Study of Cycles. He also ran a workshop at the Market Technicians Association 1999 Annual Seminar. He has been a regular commentator on the Reuters Financial network, both in the US as well as in Japan, as well as being published in the Market Watch section of Barrons Magazine on a number of occasions. He is currently ranked in the top five for intermediate term gold timing by Timer Digest.

For a detailed explanation of the services we provide you are invited to go to our web site at www.marketsummaryandforecast.com, where you can also receive a free two-week trial to all of our services.

You can E-mail us at LPK1618@AOL.com and LK1618@mta.org, or write to:

Market Summary and Forecast
3835R E. Thousand Oaks Blvd PMB 297
Westlake Village, Ca. 91362
or call the office at (818) 889-0485