The market is stuck in bullish limbo, unable to make fresh upside progress, but certainly not in any hurry to tumble down.
So is this the calm before the storm, or can the conventional wisdom actually be right in the belief that the market will stay high and dry on an ocean of stimulus all the way through next year's Presidential election? After all, the stock market has become the ultimate "policy tool", and is rightfully regarded by politicians and central planners as the foremost sentiment poll for the collective psyche of the country.
To help answer this question, the "smart money" is keying off the fate of the U.S. dollar as a tell-tale sign for what's coming for the stock markets. For most of the bear market, the dollar and stocks moved in sync. But since the March bottom and move into Iraq, the dollar and stocks have been moving in opposite directions.
I'm looking at this relationship closely, to see if we're going to get another anomalous leg up in stocks while the dollar breaks down to new lows. That was pretty weird, but it is what it is -- and it's what happened back in April of this year. With the dollar now flirting with new multi-year lows, and stocks right at recent peaks, then a plunging dollar and a rising stock market could once again defy logic and confound those who key off inter-market relationships.
I'm talking a bit about the dollar today because, well, not a lot is happening in the stock market right now. As my fractal dimension has been showing, we're in a very lazy congestion period, with the market storing up energy for its next chaotic streak.
Generally the longer a chart congests, the stronger the move when the trend does start. The market often works its way into a perfect equilibrium in just this way, balanced on a knife edge between two possible outcomes. Then a chaotic energy push is administered by some exogenous event, and prices swirl off in that direction. This is really the essence of a chaotic, non-linear dynamic system like the markets: It's both predictable and unpredictable at the same time. We can have a pretty good idea how a scenario is going to unfold once it has started -- we just can't know exactly when it's going to start, which way the energy is going to be released.
Judging by the VIX, it's looking more and more likely that the next energy push is going to be downward. The VIX has tumbled down low and stayed low, and it can only stay down so long before the pendulum of sentiment comes careening back against bullish complacency. Our sentiment tank is now only a paltry 2% full.
So we remain in limbo between 1024 and 1040. Bullish limbo, I should say. Below 1024, and the energy will be fully releasing to the downside. Above 1040 and it's going up -- and probably up in short order -- as stops and break-out players flood in at that level.
So now more than usual the market is in a position to be buffeted by whatever spot news flow is deemed important. This remains a poor market for position trading, and contrarian strategies.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: Drained 2 points to 2% full of negative sentiment.
SHORT-TERM: In a neutral phase with a bullish bias.
MID-TERM: Progressed 9 points on the advance side to 42% but with REGRESSING CONFIDENCE to a mere bullish 1.
LONG-TERM: Regressed 1 point to 30% on the decline side with Confidence slipping to neutral (0).
BOTTOM LINE: The gauges are a bit whacked because they keep hunting for a trend that isn't there. When there's no sustained momentum it's very tough to measure sustained momentum. That said, the level of the tank has been extremely informative and the following graphic illustrates just how.
%img(031008tankblowup)%
As you can see, when the tank drains down close to 0% (and we're now at 2%) local tops have formed. And that has applied to even this most recent cyclical rally off the March lows.
Now, no secondary indicators are perfect. And we COULD be wrong this time...and Earnings Season could provide some surprising behavior. But with the Empty Light flashing on the Sentiment Tank, there's more room for short-term movement in stock prices to the downside than to the upside..
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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