Thus far, the bears have been unable to break the bull's grip of this market despite some good catalysts, namely, disappointing retail sales and consumer confidence. A lot of bears I'm sure are probably very nervous and/or extremely frustrated that the market didn't tank because of these bearish news items....but it looks like they will get some play soon. I have found that in very strong trending markets sometimes it can take a few days for the news to sink in because the momentum is just so strong.
To game a turnaround in this uptrend you need to see some sort of evidence that the bulls are getting greedy and/or the shorts have given up. I'm not so sure about the latter but as of Friday, I am seeing the former. The dip we saw on Friday was over-aggressively bought by the bulls. How do I know? The NASDAQ/NYSE volume ratio spiked to an "off the charts" reading of 2.72. Recall that this ratio gives you an indication of greed vs. fear. When investors are greedy, they will favor the high beta names in the NASDAQ vs. the more conservative NYSE stocks, thus the NASDAQ/NYSE volume ratio will be elevated. To put the current reading of 2.72 in perspective consider the following points:
a) This reading is the largest I've seen in several years. It marginally surpasses the reading registered right at the bull market peak in October 2007.
b) During the past few months a reading this high occurred 3 times:
1) June 10th - the SPX was down 7% from this point in 2 weeks time
2) July 6th - the SPX was down 3% from this point in 3 days
3) July 24th - this turned out to be a false signal. The market simply chopped
around for a few days before going higher. However, at this time other
sentiment indicators were conflicting with the NASDAQ/NYSE ratio which I noted
in my July 24th post titled "Conflicting Indicators".
Since other indicators such as the Rydex ratio and the sentiment surveys are corroborating the bearish signal given by the NASDAQ/NYSE ratio this time around unlike last time, it makes it quite likely that we won't get a false signal this time, thus I expect a pullback of at least 3% to occur starting this week sometime. Hence, I will be looking for bearish entry points unless I see these signs of greed reverse themselves quickly, which has tended to be the case anytime we see the market have a modest decline.
I still have to say this though…the wall of worry from a longer term perspective is still well in tact and there’s good reason to believe that the economy will surprise people to the upside. I’ll discuss this in the next post.
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