Yesterday had all the makings of a key reversal day in the S&P 500. It was an "outside down day" -- where prices open higher than the previous day, but end up closing lower -- and it came on heavier than normal volume. Perhaps most tellingly, the decline came on much higher volume than the prior up moves.
It was yet another instance of prices firmly rejecting a move to a higher plateau, and instead turning tail and running for the safety of "home", which is the 868 to 884 level on the S&P 500 (SPX). The mid-point of this home range is the mystical 876 level, which continues to exert a strange magnetic pull on the SPX.
This is yet another instance of too-much-bullishness keeping a firm lid on the upside. I've detailed how the VIX, VXN, and QQV are all signaling that market participants are carrying far too much hope about the future. The market is having a very difficult time sucking in new money at this point, and can be easily overwhelmed by the vanguard of the bullish majority starting to throw in sell orders.
Interestingly, even with yesterday's big reversal, there was still no "spark of fear". The VIX didn't budge. People are living in denial.
One thing I've found is that while this gauze of complacency is still over the eyes of market participants, it's best not to jump the gun on big short positions. Since there was no real jump in the VIX, the market is still in a position to put in another rally attempt, based solely on hope. So we may yet see a few more grinding attempts higher.
But at this point, it's already clear these efforts are going to end tragically for the bulls. Yet we'll stick to our discipline, and only go into Rydex positions when we see that "spark of fear" show up in the VIX. Without evidence of real emotional selling pressure, the market can easily be pushed higher on light volume -- as we've been seeing during the last few rally attempts. So we'll continue to wait, with fingers poised over the "sell" button.
Plus the bulls still have a few things to pin their hopes on. There's a really nice uptrend line off the bottom that has yet to be breached. And the SPX recently closed over the 200 day moving average, which is a measurement that I don't think is very useful, but excites many nonetheless.
Unfortunately for the bullish case, the SPX moved right back down and closed just under this 200 day average yesterday. To me, the more important barometer of the market's underlying price health is the 40-week exponential moving average, which is the pink line on the weekly chart below. Once again, price has rejected a move above this level.
A convincing close above this level -- that holds -- would be a different story for the markets. Then we may have to entertain the notion that "this time it really is different", and the market can actually put in a significant rally with sentiment already at bullish extremes. But at this point, that's just a daydream.
In the longer-term view, you can see how this 40-week exponential moving average has kept a lid on every bear market rally. So far, this time is definitely not different.
Another good sentiment gauge -- the bond market -- is showing no such compunction about showing its hand. Bonds have broken their downtrend line, and given a daily buy signal on our best timing model. It's going to be very difficult for stocks to go up with bonds on a daily buy.
Another interesting sentiment "tell" that we can throw into the mix is the US dollar. The dollar has been stuck in a hideous downtrend for months that shows no signs of letting up. The dollar at least managed to stop going down during the Iraqi victory rally -- but it hasn't even been able to move over its 10-week exponential moving average.
Now the US dollar is showing signs of wanting to resume its downtrend. I'm sure we could argue about the long-term fundamental effects of this move down in the dollar, but in the mid-term a weakening dollar is not a good thing for the US stock market. So we'll keep a close eye on this.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: The tank drained down 1% to 17% full of negative sentiment on Wednesday. With the SPX dropping 1.2% one would expect to see some RISE in negative sentiment. It didn't happen. So the market grows "complacenter and complacenter," as it trundles awkwardly to and fro, thus far making very little net headway.
SHORT-TERM: The hourly gauge has been in an extended advance phase. We're now getting crossovers that suggest this gauge is trying to enter a decline phase. But it hasn't quite done so definitively.
MID-TERM: The mid-term gauge progressed 2 points to 95% in its advance phase. The Confidence Diffusions Index clicked down a point to 2 (out of 7).
LONG-TERM: The weekly gauge remained unchanged at 69% in its newly launched advance phase. The weekly gauge entered the advance phase at a middling level, not at an extreme, so we're cautious about the potential for upside follow-through. The weekly CDI clicked back a point as well, to 3 (out of 7)
BOTTOM LINE: Thursday, Expiration Day for options this month, will be all about squaring expiring positions, not about marketeers trying to divine underlying trends. Technical arguments can be made intelligently by both bulls and bears. However the sentiment picture strongly suggests that there has been too big and too fast a rush into the bullish camp. Historically when there's a rush like this in one direction or the other the market requires a counter move to rectify the imbalance.
The VIX has reached 17% below its 20-dma. When it turns back up above 16% below, that will have a good chance of being the start of a decline phase that's worth something to a trader. (We look at some pictures of the VIX's behavior and discuss more on this subject in this morning's Agile Trader Pre-Market Update.)
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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