The market did what it had to do on Monday to keep the uptrend alive and healthy. Pressure in overseas market and the continuing plunge of the dollar had the early action looking mighty iffy, but major buy programs into the close put some distance between the closing price and the magic, critical 1060 level on the S&P 500.
Both long and short positions above this 1060 level have been a tough slog ever since the pop up and over. Why? Because the market has not really been in a trend since then. Remarkably, my 150 trend/congestion indicator is still showing congestion.
One thing that I've noticed occurs at major and important trend changes is what I call "fibrillation", where the market makes sudden, arrhythmic changes in direction, in wide swings. The fairly wide up and down swings here may just be indicative of a change of state in the market, although we won't know that until the SPX at least comes back down through 1060.
We'd also need to see the VIX and VXO enter a new state of existence, one where investors and traders show a little fear. This hasn't happened, and as far as these now-forgotten indicators go it's still business as usual, as they drift ever lower as the market grinds higher.
Every tenet of contrary investing continues to point to a market badly in need of a correction in bullish sentiment. Yet it's not happening -- at least not yet. And it just hasn't been the best idea to short a market that keeps pushing up to make new highs, except if you're going for the intraday "scalp".
So while it's against my basic principals of contrary position trading to go long with sentiment at such bullish extremes, I also have little appetite to go short while the market stays above 1060. As I've written, the last stage of a bubble or mania -- and I certainly think this qualifies -- can often be the most dramatic in terms of price movement. There's still a decent shot that this market can soar up to the 50% retracement level of the bear market at SPX 1150, and you don't want to cling to bearish positions during such a blow-out.
But personally I'm content to watch this weird show from the sidelines for now, sort of like the "wise old men" did during that bubble blowing back at the tail end of 1999 and the first few months of 2000. And I know what you're thinking, but I just don't think it's possible for people to do what everybody fantasizes can be done; that is, ride up a bubble for all it's worth, and then deftly switch to the short side at precisely the right moment. That's pure fantasy. The human psyche doesn't allow those who buy into a bubble to make such an instantaneous shift. A bubble, by definition, inspires a feeling that it will go on forever, and that's precisely the feeling that's being inspired now.
Sentiment Dashboard
By Adam Oliensis
SENTIMENT TANK: Drained 0.8 points to 6.7% full of negative sentiment. While the VIX dropped the Put/Call ratio shot higher to 0.93, which, on a contrarian basis, may be bullish.
SHORT-TERM: Shot into an Advance phase in the last hour of trading on Monday.
MID-TERM: Progressed 3 points to 82% in its Advance phase with Confidence moving a strong 3 points in the bullish direction, crossing the ZERO line to a Bullish +2.
LONG-TERM: The weekly gauge, which crossed over into a decline phase at the end of last week, rolled back up into an Advance phase to a bullish 81% with Confidence here pulling the same trick as on the Mid-Term gauge.
BOTTOM LINE: The last chunk of Monday afternoon was pretty stunningly bullish. Our Confidence readings had been tugging down but have reversed themselves sharply. Was this a trap for the bulls or for real? The fact that the Dow was able to move up 100 points (with the SPX keeping pace) while draining less than 1% from the tank is a significantly bullish change of character.
We'll have a better idea if it's for real after the Fed talks this afternoon. An up close on volume today would likely yield some buy signals on short-term momentum oscillators. But with the tank drained so low, , and with the Dow apparently drawn magnetically to 10K, I still gotta think it's wise to be cautious about short-term upside. HOLDING over 10K would then be important for the Dow, just as holding over 1070 on the SPX would be important. The action could become extremely herky-jerky after 14:15 EST today.
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