For the past few weeks I have noted that I don't see sentiment leaning too far one way or the other, and I still believe that is the case.
On an anecdotal level, on Thursday afternoon I commented to someone that the S&P 500 was exactly where it was three weeks ago. In a rather downbeat tone, this person said it feels like it's down a lot more than that. After Friday's rally I noted to someone else there were rumors the Chinese rating agency Dagong was set to downgrade U.S. debt again should the Fed engage in more quantitative easing. His comment to me, also in a rather downbeat tone, was that the news doesn't matter -- that market only goes up.
One might conclude that the first market player has been long and the latter one has been short. I do not know that, but I do know this: To my ears, these divergent views on the market are what keep me believing sentiment is not one-sided but, rather, evenly divided. On down days, folks despair, and on up days, bulls rejoice.
There are some who will fuss over the move upward in bulls in the American Association of Individual Investors' weekly poll. The bulls now stand at 45%, the highest reading since February. However, it is my view that, unless the AAII readings are confirmed by the Investors Intelligence readings, they are only "of note," not "a signal."
The Investors Intelligence readings show the bulls at a similar 45% level, but in July these folks were pushing the 50% level. If this week sees a significant upward move into that 50% area, it could become problematic for the market, though that's typical of 50%+ readings in general.
The folks who vote in the Market Vane weekly survey have definitely taken a turn toward increased bullishness. This past week these folks jumped to 52% bullish. Again, you can see that, in July, they were up above 60% -- so 52% is higher than it has been, but not "too bullish."
As such, I surmise that, while folks are more bullish than they have been, they are not yet at the point that says they are "too" bullish.
Given the fact that Friday's rally took the S&P 500 back to where it has been several times before, the downtrend line I wrote about early last week is back in play. I estimate that that downtrend line as coming in around 1275. I am certain folks will be quite excited should the index break out above that level -- but, should that happen, I would ask you to pay attention to some statistics.
For example, the number of stocks making new highs was at 174 back on Oct. 27. Earlier last week there were 75 new highs on the NYSE, while Friday saw 53. Expanding new highs -- not a contracting number -- is what you'd want on a breakout.
Then there is the overbought/oversold oscillator -- which, as I noted late last week, had gotten back to an oversold condition. You can see it has ticked up from Friday's rally. The question now becomes whether the market can make a higher high if it breaks out. That doesn't seem likely.
I will note, though, that the 30-day moving average of the advance-decline line made yet another higher high, so this would have me believe that any market decline in the next week would lead to another rally. Higher highs get retested, just as do lower lows.
The question for this options expiration week is: How giddy will folks get if the S&P crosses the downtrend line -- and, it is crossed, will the indicators lag or confirm?