After a run up off the 1,870 lows area the market started to show some hesitation the past couple of sessions and our sense was the market wanted to see what earnings season was going to bring to the table. We got some weak reports overnight from the Banks which are pressuring that group and a profit warning from Walmart which hit the Retail group and the Dow. We have a flood of earnings due from the majority of the SP 500 in the coming 2-3 weeks so expect the volatility to continue as the market parses out the reports in the various sectors. The early read is not great but as always we still have a ways to go in earnings season so buckle up for some related volatility as we see most earning cycles with some good nights and some bad. The expectation is for some contraction this quarter but the guidance/outlooks will be essential going forward.
On the sentiment front it's normal for the bulls to start coming back in and for the bears to start backing off a bit when the market has trouble falling for a few weeks. Like I always say, fear requires action, no matter what side of the trade you're in. If the market is going up you'll see the bears run out and if the market is going down you'll see the bulls head for the hills. We got down to a reading of a bit over minus -10% and then went up to minus-4% but now were positive +5% on the Investors Intelligence survey. Still a favorable number for the bulls. Not as good as it had been but when you reach minus double digits the pessimism is really extreme thus some type of market bounce pretty much had to occur. It has and now we're beginning to unwind but make sure you recognize that a positive +5% is still an excellent number for the bulls. It wasn't too long ago we spent nearly two years over 30% with approximately a quarter of that time over 40% which is really extreme. We went as high as 46%. Off the charts bullishness. We would have to get well over 20% for the bulls to start to have to worry a bit and if we ever got to 20% the market would likely be at new highs. The bottom line for the moment is that there are enough bears and shorts out there that if the market got the right news as a catalyst the market would have the opportunity to blast higher.
See the Banking Index Daily Chart Below:
See the Dow Jones Broadline Retailers Index Below:
Sp 1950 to 2030 is now the range for the short term. Those are literally the only numbers that matter when understanding what's next. If the market were to lose 1950 on a closing basis or massive gap and moving average support, then the market would be in very deep trouble. On the other hand, if we can get some good news and get the bears to cover their shorts, it would carry us over the 200 day exponential moving average and cause even further short covering. The bears would be feeling a lot of pain in the short term. Of course, these are all on a closing basis and with a little bit of force behind the move. A close at 1945 or 2035 wouldn't give me much confidence but if we get at least a half a percent to one percent then I'd feel much better about the message being sent. In between 1950 and 2030 is just noise. A very difficult four percent range of activity. Back and forth with no real direction. Just back and forth meandering. We're somewhat used to that by now but that doesn't make playing the range any easier. Simply, if you must short or go long, use the oversold or overbought rsi's as your guide. The market remains extremely difficult with no end in sight. Just the usual day to day movement based on news from overseas or something here at home from the fed or from economic news. You should not be getting aggressive. Do what feels right to you of course but if you're buying, using weakness would seem the best strategy. If you're shorting, using strength would seem right. Nice and light is truly the easiest on the soul.
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