The short-term picture
Over the short term, the markets are gapping every which way, but are still essentially following the script which is calling for a thrust, pullback, thrust.
The only question for me is how far back is this pullback going to go, before we get the rebound back up to the recent highs. SPX 858 has been holding up, as the markets bounced there yesterday. This morning we gapped right back down to this level on the open, and it's held again. This is the level where the bulls are digging in.
A break here could lead to a quick move down below SPX 850, but below there I'm planning to be alert for buy signals. It looks like the market really only needs one more push down before the next uptrend can get rolling, and it doesn't necessarily have to be that much below where the market is now.
It would be very helpful for the bullish case if the VIX could pop up a bit. This morning the VIX has opened higher, over 33 -- but this isn't really too encouraging for the next leg up. It would be much better to see the VIX climb all the way back to the recent highs over 40 on this pullback. That would have set the stage for a significant run, likely all the way to the neckline at SPX 965.
Now we have to scale back our projections for the next up leg, and regard it as a likely great shorting opportunity when the momentum eventually flames out. At this rate, a move up to, say, SPX 900 - 910 would have the VIX dropping down into the mid 20s, and that would give tremendous confidence to sell signals and short positions at that point.
As I mentioned yesterday, the longer-term health of the market looks extremely dubious, as so many are still stuck on the notion of "catching the bottom." This latest uptrend has really brought this sentiment problem into focus.
The Bigger Picture
Here's a pretty horrific chart that sums up the sentiment problem with one glance.
Way back at the beginning of the bear market, I had a conversation with the sentiment guru, Phil Erlanger, in which he off-handedly mentioned "what to look for to tell you the bear market is over".
Phil's key is really pretty simple: We've got to see put buying completely dominate call buying.
Using the QQQ -- the most widely traded options contract, especially among retail investors -- we can see that this just isn't happening. It's actually astonishing that call buying has persisted to this degree, so far into the bear market decline.
The red line on the chart below shows the call/put ratio on the QQQ; the green line shows the put/call ratio.
You can see back at the tail end of the bull market, put buying was running high -- and the green line was over the red line. When those lines flip-flopped back in April 2000, it marked the exact start of the bear market for the Nasdaq 100 and the QQQ. Remarkable.
Way back then, Phil told me to wait until those lines flipped back over before becoming bullish for the longer term, with the put/call ratio (green line) jumping back over the call/put ratio (red line). Only then will we have the foundation of negative sentiment to create a long-lasting bull trend for the markets.
We're still waiting. Don't get me wrong: this sentiment picture certainly doesn't preclude some rip-roaring rallies, but they are just going to be of the trading variety until we get this sea-change to pervasive negativity. Looking at this chart, it's actually discouraging to think how long this process might take. It could be years.
My feeling is that the markets have had a good window of opportunity to go up off the dramatic October lows, but this opportunity is being squandered. The cascade lower may not come soon, as the markets could stay in this very wide trading range for many more months.
But if the sentiment picture doesn't change, then it's likely that the eventual break out of this range will be to the downside.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: The tank filled 2 points on Thursday to "42% full" of negative sentiment. The VIX was virtually unchanged but the 20-dma of the Put/Call Ratio is rising, which raises negative sentiment.
SHORT-TERM: The hourly momentum of sentiment has been creeping down but is essentially neutral.
MID-TERM: The mid-term momentum of sentiment progressed 2 points in its advance phase to 96%. It is now well into overbought territory. It is possible for the market to move higher with the gauge in this position but the momentum of sentiment may well be exhausted. We'll watch our CDI, which remained unchanged at 4, for clues. If it regresses toward zero or into negative territory then we'll be on the alert for a sell signal. If it remains strong (esp. at 3 or above) then we'll look for further upside before the sell signal comes.
The gauge turned up into this advance phase as of the close on 2/19/03. Since the opening price on 2/20 the SPX has netted a mere 23 point gain, and included a shakeout that broke to a lower low and flipped the gauge ever so slightly negative for a day. Meanwhile the tank has drained from a high of 84% or so down to a low of 40%. That's lousy mileage. That's a weak advance phase. We've burned a lot of negative sentiment without making much advance. The tank could burn down to 30% or lower, but that would likely require some kind of positive thrust from war news.
LONG-TERM: The weekly gauge is now in neutral for its second day. The gauge remained unchanged as did its CDI at a bullish 2. Given the position of the mid-term gauge it is doubtful that much of a weekly advance phase could begin right here.
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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