The 30-minute chart of the S&P 500 (SPX) shows the market's dilemma right now, at a glance.
Is the current strength just a test of last Friday's high, setting up a scare for the rampaging bulls? Or are the bulls going to grab the reins yet again and press to a new high?
Although the market has been strong this week, even though it's had every opportunity to collapse, this is likely building a false sense of security among the vast majority of market participants. The lingering strength around the highs is even convincing many bears as well. I think there's a very good chance that the market will crack below this triangle and plunge all the way back down to the 950s, as a start.
We've got to remember here that the number of bearish advisors now stands at 16.3%, and the number of bulls at 58.7%. Here's a chart (borrowed from Adam) that shows the bull/bear ratio. It's literally off-the-charts.
The VIX is parked in the low 20s as well. This is the kind of sentiment imbalance that can cause a ruckus when the market starts to move against the majority opinion. And just because this move hasn't happened yet, it doesn't mean it's not going to happen.
In fact, the reactions to extremes tend to be very sharp. But as I've stated before, a quick, scary descent that throws sentiment into disarray would actually be the most bullish thing for this market. A pullback to SPX 935 or lower would likely be a pretty good buying opportunity, as the bullish forces that have been unleashed are likely not to be vanquished so quickly this time. In that sense, this time really is different, in that the strength of the current bullishness is so overwhelming. It's going to take a lot more convincing this time to turn the crowd bearish again.
Ultimately, the turning of majority sentiment back to bearishness is going to involve dramatically lower prices. But before we get there, it's likely that a sizeable dip is going to be first looked at as a buying opportunity. Accordingly, I think the game plan will be to look on any VIX spike over 30, accompanied by a quick drop in the SPX, as a buying opportunity as sentiment reverses. That's a tentative plan, mind you, but that would be the high-odds play in this current environment.
But first we've got to deal with a pullback. We're going to look at any move below the current SPX triangle as the start of a deeper pullback than any we've seen since the March low. I'm recommending removing our long hedge in the SPY if the S&P 500 cash index moves under 990 and stays under for a full 30 minutes. This way we'll be looking to ride the pullback down un-hedged on our 50% Rydex Tempest position.
The evidence is mounting that this rally is simply a major liquidity event, and the fundamental bullish underpinnings of a true lasting bull market just aren't there. This doesn't mean the rally can't linger, or even make a much bigger push higher. As we've seen, liquidity and majority sentiment can be a very powerful mix. But it does argue strongly that no matter how high the market goes now or in the immediate future, eventually it's going to come crashing back down.
You can check out an interesting but not-so-reader-friendly essay entitled "Has a New Bull Market Begun?" by an economist named Frank Shostak from the Ludwig Van Mises Institute, for more details on such a fundamental economic case.
In this essay, the author makes a detailed argument why the pumping of the money supply can cause a "reshuffling" of assets in the short term, but that ultimately this is not a solution if the pool of real savings and real wealth in the economy is not expanding. It's certainly food for thought, for both bulls and bears alike.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: Filled by 3 points to 5%. There is no trend here. This is extremely unusual. Even more unusual is to have NO trend in the tank and an extreme level of "trendingness' in the SPX.
SHORT-TERM: Hourly gauge is flat. . No momentum here to speak of. The advance phase exhausted itself after the last "zit" of fear and we're back to neutral.
MID-TERM: Regressed to neutral at 29/71 Our Confidence Diffusion index (CDI) also regressed to neutral at ZERO.
LONG-TERM: Neutral at 98/2. Weekly CDI is at a bullish 2 largely because the uptrend in price has not reversed.
BOTTOM LINE: Way back when I mentioned that IF the tank should drain down toward 0% and remain there for a protracted period that that would indicate a distinct change in phase for the market from bearish to bullish. That's what's happened. The sustained and relentless buying pressure even in the face of too-extreme levels of bullishness is telling us that money continues to move into the market from non-participants. There will be pullbacks and the tank will rise again, but this sort of money flow into the market is unlikely to abate all at once...nor is it close to having exhausted the supply of available liquidity.
Note: Earnings Warning Season is virtually upon us. So far, however, the market has shrugged of warnings from the likes of NOK and MOT. It remains to be seen whether its current "crack-cocaine high" can sustain itself while enduring additional doses of such anti-psychotic news.
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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