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The Morning After

7/11/2014 6:01:07 AM

Good morning Traders,

As we've seen with this market advance, the market remains resilient. When a large gap lower is recovered mostly during the trading day, that's a sign of lack of follow through to the downside, and more buyers than sellers.

But periodically it is also a warning sign. The key is follow through. There is still a lot of bearish positioning in the market, which means traders expect downside, and the crowd is normally wrong. That being said, let's look at where people's minds are at...

AAII % Bulls minus Percent Bears Chart

This divergence between you individual traders and us newsletter writers isn't that significant - but the key is we're working off an overly bullish period.

Another sentiment measure is quickly moving to fear, which is bullish, more often than not. Rarely will the market tank when traders position for it. The market machine needs complacency to sell off.

Equity Put/Call Ratio Chart

And finally, one precursor to a sell off is the characteristic that the Nasdaq is weaker than the NYSE. And we're seeing that again, as the internals are very weak on the Nasdaq.

QQQ versus SPY Relative Strength Spread Chart

So while the conditions exist for selling, the rampant positioning for a sell off (shorting, buying puts) suggests to me that the market will hang up for at least another week.

Regards,

 

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