We thought it might be a good idea to review sentiment today. It should be no surprise that investors are very bullish right now, but how bullish? Too bullish? The charts tell us one thing for sure and that is that sentiment could get even more bullish based on history. Remember that sentiment is contrarian so very bullish sentiment is not necessarily good for the market.
First up is the National Association of Active Investment Managers (NAAIM) Exposure Index. Those surveyed primarily use technical analysis in their processes so it is interesting to see how exposed or leveraged they on the market. We have certainly reached exposure levels that could pose a problem given the last two readings at this level resulted in declines. At the same time, readings can get much higher than they currently are and it doesn't always spell disaster. It is interesting to note that these analysts are very bullish, almost fully invested, but they aren't leveraged yet.
Next up is the American Association of Individual Investors (AAII) chart. Here we see some bullish extremes as noted not only by the amount of bulls, but also shown in the Bull/Bear Ratio. These high ratios often occur before declines. The 2020-2021 rally wasn't bothered by these high ratios and that could be the case this time around as well, but this chart tells us to not let down our guard yet.
Finally a quick peek at our Rydex Ratio chart. This is a 'money where your mouth' is indicator. We aren't looking at polling results, but actual dollars. We take the total number of bull assets and divide them by total bear and money market assets. Bull assets have climbed considerably, but they aren't at levels we've seen prior so there is room for expansion. However, we have to note that bull assets at this level, often times leads into a decline.
Conclusion: Bullish sentiment abounds, but it isn't as bullish as it could get. Given the strength of the current rally we think we will see even higher bullish sentiment readings. If the 2021 rally is any indication, these sentiment measures can get extended and not result in lower prices.
The DecisionPoint Alert Weekly Wrap presents an end-of-week assessment of the trend and condition of the Stock Market, the U.S. Dollar, Gold, Crude Oil, and Bonds. The DecisionPoint Alert daily report (Monday through Thursday) is abbreviated and gives updates on the Weekly Wrap assessments.
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MARKET/INDUSTRY GROUP/SECTOR INDEXES
CLICK HERE for Carl's annotated Market Index, Sector, and Industry Group charts.
THE MARKET (S&P 500)
IT Trend Model: BUY as of 11/14/2023
LT Trend Model: BUY as of 3/29/2023
SPY Daily Chart: The RSI is back in overbought territory and the PMO turned back up, but today saw a lower high so technically the market is in a declining trend, barely.
Apparently the VIX puncture of the lower Bollinger Band did lead into higher prices today. It continued below its lower Bollinger Band on the inverted scale so more upside could materialize.
Here is the latest recording from 12/18 (no trading room 12/25 or 1/1):
S&P 500 New 52-Week Highs/Lows: New Highs contracted on the rally, but only one New Low was logged. Still, we should've seen more New Highs on a rally of this magnitude.
Climax* Analysis: There have been four consecutive initiation climaxes (upside and downside), and none have been useful predictors of subsequent market action. Today's upside initiation climax could prove to be just as useless.
*A climax is a one-day event when market action generates very high readings in, primarily, breadth and volume indicators. We also include the VIX, watching for it to penetrate outside the Bollinger Band envelope. The vertical dotted lines mark climax days -- red for downside climaxes, and green for upside. Climaxes are at their core exhaustion events; however, at price pivots they may be initiating a change of trend.
Short-Term Market Indicators: The short-term market trend is UP and the condition is OVERBOUGHT.
Swenlin Trading Oscillators (STOs) continued lower on the rally which puts it in jeopardy. We did see a nice rise in %PMOs Rising, but we don't have a full recovery from yesterday's decline.
Intermediate-Term Market Indicators: The intermediate-term market trend is UP and the condition is EXTREMELY OVERBOUGHT.
We had to double check it, the ITBM did decline today alongside the ITVM which also declined slightly. These indicators are highly overbought and need relief. They are also oscillators and oscillators must oscillate; therefore we don't want to read their decline as overly bearish. In any case, it isn't bullish when they decline.
PARTICIPATION: The following chart objectively shows the depth and trend of participation in two time frames.
- Intermediate-Term - the Silver Cross Index (SCI) shows the percentage of SPX stocks on IT Trend Model BUY signals (20-EMA > 50-EMA). The opposite of the Silver Cross is a "Dark Cross" -- those stocks are, at the very least, in a correction.
- Long-Term - the Golden Cross Index (GCI) shows the percentage of SPX stocks on LT Trend Model BUY signals (50-EMA > 200-EMA). The opposite of a Golden Cross is the "Death Cross" -- those stocks are in a bear market.
The market bias is BULLISH in all three timeframes.
The short-term bias is bullish given all of the participation measures are reading above our 50% bullish threshold. The SCI is vulnerable to decline as we do have smaller percentage of stocks above their 20-day EMA. Yesterday %Stocks > 50EMA was reading below the SCI. Now it is above so the SCI should be able to move a little bit higher. The GCI is safe from harm as %Stocks > 50/200EMAs percentages are above the GCI. Unfortunately the GCI does hold a negative divergence with price presently.
BIAS Assessment: The following table expresses the current BIAS of various price indexes based upon the relationship of the Silver Cross Index to its 10-day EMA (intermediate-term), and of the Golden Cross Index to its 20-day EMA (long-term). When the Index is above the EMA it is bullish, and it is bearish when the Index is below the EMA. The BIAS does not imply that any particular action should be taken. It is information to be used in the decision process.
The items with highlighted borders indicate that the BIAS changed today.
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CONCLUSION: The market was back to rising with a strong rally. However, it didn't manage a higher high so there is still some weakness. Today's upside initiation climax was not accompanied by rising STOs or ITBM/ITVM. Still, internal strength can be seen in high participation readings. We continue to look for a market decline as this rally has run too hot for too long and the VIX is beginning to rise as investors get a bit nervous. However, we doubt that the market will have a big decline right before the holidays. More likely we will see Santa keep things clicking. January will likely be our time of reckoning.
Erin is 85% long, 0% short.
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BITCOIN
Yesterday's comments still apply:
"Symmetrical triangles are continuation patterns. In the case of Bitcoin the prior trend was up so an upside breakout was expected. This triangle could also be a pennant on a flagpole which would suggest much higher prices ahead. The indicators are beginning to firm up so we do see Bitcoin moving higher from here."
INTEREST RATES
Yields rebounded on the day, but ultimately we believe the declining trend will continue. We are waiting for short-term rates to weaken to clear up the currently inverted yield curve.
The Yield Curve Chart from StockCharts.com shows us the inversions taking place. The red line should move higher from left to right. Inversions are occurring where it moves downward.
10-YEAR T-BOND YIELD
Yesterday's comments still apply:
"Yields are back to tumbling lower. $TNX is in a declining trend channel that we believe will continue to hold up. The chart is especially bearish with the deeply declining PMO and Stochastics staying below 20. The RSI is oversold, but until we see better movement on the PMO, we suspect it will stay oversold for some time. Rates should continue lower."
BONDS (TLT)
IT Trend Model: BUY as of 11/28/2023
LT Trend Model: SELL as of 1/19/2022
TLT Daily Chart: TLT formed a bearish engulfing candlestick today which portends a decline tomorrow. Overall, rates are bearish and Bonds are bullish. Our PMO suggests TLT isn't done with this rally. Stochastics imply internal strength so even if we do get a decline tomorrow, we don't think this will turn into a correction.
We notice resistance on the 1-year daily chart around 100, but again, yields are likely to continue lower so we would expect TLT to easily overcome any overhead resistance.
DOLLAR (UUP)
IT Trend Model: NEUTRAL as of 11/27/2023
LT Trend Model: BUY as of 5/25/2023
UUP Daily Chart: The Dollar still hasn't decided what to do. The indicators look bearish so we have to assume the Dollar will continue lower. The RSI is negative, the PMO is falling on a SELL Signal and Stochastics just dipped below 20.
This could certainly firm up as a good reversal area for UUP as it hasn't broken below the 200-day EMA yet, but indicators need to start looking at least a little bit bullish.
GOLD
IT Trend Model: BUY as of 10/23/2023
LT Trend Model: BUY as of 10/20/2023
GLD Daily Chart: We're getting more bearish on the Dollar and that means we are bullish on Gold. Gold has been moving sideways for some time. It hasn't given the PMO a direction. We really like the look of Stochastics right now which are rising in positive territory. The RSI is positive and not overbought. We should see higher prices for Gold.
Yesterday's comments still apply:
"Sentiment is spiking lower so investors are more bearish on Gold right now. They aren't exceedingly bearish so we aren't ready to list this as a plus for Gold. Sentiment is contrarian, but it works best when discounts are much higher."
GOLD MINERS Golden and Silver Cross Indexes: Gold Miners erased a portion of yesterday's losses. Participation remains robust and the PMO is attempting to reverse higher. There is plenty of internal strength to keep prices moving higher. Stochastics are back above 80 which confirms the internal strength in participation. If Gold gets going this group will benefit greatly.
CRUDE OIL (USO)
IT Trend Model: NEUTRAL as of 11/7/2023
LT Trend Model: SELL as of 12/18/2023
USO Daily Chart: Crude managed a small rally today. We had hoped that when we annotated the declining tops trendline and brought it toward price bottoms that we would see a bullish falling wedge. Not so, it is a declining trend channel. Price just hit the top of the channel and is now due to decline to the bottom. The PMO Crossover BUY Signal is encouraging, but it could simply be telling us there is diminishing weakness, not necessarily new strength. Stochastics do suggest an upside breakout ahead, we just believe tight stops should be placed on Energy positions in case this trend channel holds up.
Overhead resistance has been met so more decline is not out of the question.
Good Luck & Good Trading!
Erin Swenlin and Carl Swenlin
Technical Analysis is a windsock, not a crystal ball. --Carl Swenlin
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