Anyone who looks at a chart, even one who is not terribly adept at recognizing patterns or understanding charts in a meaningful way can see the resistance overhead on almost every single chart. Even if they can't identify the resistance area I am certain they can see that the Russell 2000 and the Transports are banging up against still declining 200-day moving averages.
Some might ask if we can breach the moving average and still be in a downtrend. The answer is of course we can. See how we got over the 50-day moving average (blue line) in March/April and still managed to head back down? But instead of focusing on the moving average line, why not focus on the indicators?
We are overbought. It hasn't mattered. In fact what the market has seen is several red days for the S&P 500 - would it surprise you to know that seven of the last 10 days have seen the S&P red? The down days are moderate and the up days are up nicely so it ends up with a rally but to me that's the overbought condition trying to get worked off.
Here's the situation though. Unless we get breadth red for some meaningful number of days we won't get back to even a moderate oversold condition. We simply remain overbought.
And breadth as I've said for weeks now has been good. It continues to be good. That is bullish. The McClellan Summation Index has made a one year high.
The number of stocks making new highs remains tepid, or at least there has been very little expansion. If you own individual stocks you probably noticed that on Friday many reclaimed some/most of what they lost intraday on Thursday but didn't really make any progress. We looked at iShares iBoxx High Yield Corporate Bond ETF (HYG) Friday, noting it had backed off from resistance but that was it, there was no damage done. Now look at Friday's rally: the move was up, it closed at the high of the day, but just couldn't recapture Thursday's high. There are a lot of charts like that.
On the sentiment front there has been a bit of shifting in the last few days. No, folks are not throwing caution to the wind, but we've discussed the Investors Intelligence bulls and bears swapping places since June. However the American Association of Individual Investors (AAII) are much more reluctant to jump into the fray as they still show more bears than bulls.
The National Association of Active Investment Managers exposure has however moved in similar fashion to the Investors Intelligence survey. They have lifted their exposure from 20 in June to 71 at present. Over 80 would be cautionary and over 90 would be extreme. So we'll call that a shift.
The total put/call ratio hasn't budged but the equity only was 0.51 on Thursday and 0.5 on Friday. And it has been under 0.6 for eight of the last nine days. If that reading goes under 0.5, I'd consider that a major shift toward bullishness. You can see the 10-day moving average is not yet extreme but has moved down quite a lot in the last week or so.
As for the Daily Sentiment Index on the CBOE Volatility Index, that is still a bit sticky with it now at 15 after Friday's rally. It takes a lot to move it from 15 to single digits (same as it takes a lot to get it from 85 to 90 - which is why I believe this indicator works so well - it takes a lot to get it extreme). Therefore this is flashing yellow but not yet red.
The bottom line is that Friday didn't change the indicators much.
I spent some time with Blake Morrow of the Trader's Summit discussing sentiment last Thursday if you'd like to watch, click here.
