No replies to this topic

[TTHQ Staff]

The rally from the May low has done nothing more than take the S&P back towards the tops end of the trading range that has been in place since the beginning of the year. Actually the S&P did not even get to the top of that range as it failed to get above its April high let alone challenge its March high. The rally in terms of price has been mediocre even disregarding the huge breadth surge in late May/early June. This was and remains the single worst performance price wise following and during a breadth surge in the past 22 years coming in about 1/3 of the average previous gains. In spite of this underwhelming performance most all of the sentiment indicators have moved up sharply showing a huge acceptance of the rally. A number of indicators have reached levels not seen since early April and many more since early March. The asset ratio of Nova to Ursa, the bull and bear fund respectively for the S&P just last week moved above 1.00. This was the first such reading since early March and prior to that since April of 2002. The latest numbers from Investors Intelligence shows the bullish percent at its highest since early March and the bears the lowest since mid February. Market Vane has been persistently over 65% bulls and Consensus has moved to the 60% levels. The 4-week moving average of both of these indicators are at bearish levels with Market Vane hovering near a 5 plus year high. The AAII survey has been over 50% bulls for three of the past four week with bears dropping below 20%. These four surveys are what our sentiment combo is derived from. This was originally developed by our good friend Frank Barbera of The Gold Stock Technician. Other than the all time extreme seen last fall into the early part of this year, the current level is the highest since late 1997. As mentioned above, the absolute levels are not as excessive as we saw late last year leading into the March top. The one exception to that is Market Vane, which is not far off. However, late last year followed a huge and persistent rally that lasted for nearly a year. The sharp rise in sentiment follows the May rally, a rally that has seen the S&P gain a mediocre 4.5%. The negatives do not end with just these indicators. The volatility indexes for example have just turned up from the same levels that greeted both the early March and early April peaks. Yes we could rally very short-term from their current levels. In fact we did just that on both June 14 and June 29. however, both of those rallies were indeed over quickly and followed by a move to the lower end of a near term trading range that has been in place since early June. These indicators are nowhere close to levels seen at the March and May low. If we do rally from here the volatility indexes are no doubt going to move right back to to their lows of the past six months and set up another fully bearish signal from this arena. The put to call ratio remain the one area of sentiment that has not turned fully bearish are the put to call ratios. However, the 10-day moving averages of both the CBOE and equity only ratio did hit their lowest levels since late and early April only early last week. The 10-day equity ratio did hit the high end of bearish and was not far from levels seen in early March. It did not get to its extreme for this cycle seen in early to mid January. As we learned last year, extremes in sentiment are not enough reason to turn negative as they can get even more extreme. This is clearly the case in periods of strong momentum and trending prices such as we saw last year. However, this is not the case this time around. Yes we did have a surge in momentum but since early June these indicators have begun to show big divergences. These divergences are not confined to price but there is also a big divergence between breadth related indicators and volume related indicators. While the former moved to new all time highs in late May/early June the volume indicators did not come close. They failed to get above their early April peak and stayed well below levels seen last year. Moreover, in the last week while breadth indicators have been inching higher and are at or near the low end of overbought, their volume counter parts are weak and near zero. This is not a very strong combination. In fact it is a very negative combination. This combined with minimal price gains suggests that there is no true trend in the market. This suggests that what we have experienced is a very mediocre rally, one of the weakest we have seen in years. This in turn tells us that this is not like what we experienced last year, which makes the sharp rise in sentiment all the more important and one that does not bode well for the market. This does not mean that we are going to see prices begin to accelerate to the downside immediately or that there will not be one last rally to challenge and even exceed the late June peak. However, the combination of a weakening momentum picture and a negative sentiment backdrop do add support to the message from the wave structure that the post May rally is and remains a corrective pattern. It certainly does not help the bulls case that the daily trend oscillators have turned down joining a negative weekly picture. The indicators are lining and beginning to make an even stronger case that the May rally, if not complete is on its last legs. We can make a strong case that what we saw last week was it and that the post May rally is over. However, we have not yet had confirmation from price and given the Elliot patterns that is important. Short-term we are going to remain neutral and see what the market has in store early this week. However, one last shot to the upside notwithstanding, the medium-term picture remains negative and a move below the May low is the most likely course once this rally is complete. This would certainly fly in the face of conventional wisdom. We remain bearish on both the medium and long-term. Best, Larry Katz