Ok, so my hunch that a ST move back up didn't pan out and we got a downside resolution instead which I said if happened would be quite limited and put us in a better position for a more sustainable advance. We all know what triggered this latest slide - softer than expected economic data. I won't get too much into that with this post. What I'm going to talk about is feelings....nothing more than feelings....ok that was lame. Well, despite the market being down 5 weeks in a row (and working on 6) since making a 3 year high, the SPX got as much as being about 6.5% off from this peak. When you consider how far the market has risen since September prior to making this peak, never mind since March 2009, such a decline is quite modest and normal in a still ongoing uptrend. But you wouldn't know that by reading the financial media and by what traders and investors are feeling. The gloom is palpable.
Let's say you woke up from a 4 year coma and the first thing you did was pull up a 2 year chart of the market. You would probably not think very much of this latest dip. Not knowing any of the news or not being influenced by any of the legions of permabears that now make up a large part of the herd, you would probably think that the market has been looking pretty damn good and this latest dip doesn't look serious at all. But of course, that's not what the tone is out there. It feels like hopeless despair similar to what you feel in bear markets.
Since the summer of 2009 I've been hypothesizing that this has got to be the most hatest bull market of all time and that the herd never came close to truly embracing it which was a solid indication that the bull market was in fact legitimate and would carry on. Oh sure, there were moments when ST trader types and the little guy showed bullishness but that was quickly extinguished and reversed to pessimism as soon as the market showed any modest weakness....just like now. Any bullishness we see from these guys is due to the "don't fight the tape" line of thinking. Deep down most of these jokers are still bears at heart and are quick to run for the hills when we get a dip. That's why when the tide goes out, you get to see who's truly bullish who is just swimming naked (a variation of what Buffet likes to say). The trading community is full of nudists let me tell you.
Let's take a look at some sentiment measures. AAII sentiment released Thursday shows 2:1 bears vs bulls a reading that is consistent with ST and IT bottoms. We saw the same reading just prior to the massive move that began last September. But we also saw such readings at temporary bottoms in May and June of last year which from a longer term perspective were still good buying opportunities but you had to grit it out for a few months as the market ended up chopping around eventually making modest lower lows before hitting a final bottom.
A new sentiment measure I follow is called The National Association of Active Investment Managers (NAAIM). I like this because it not widely followed and it measures what people are doing with money which counts more in comparison to indicators that measure what people are just "feeling" about the market. NAAIM measures the exposure active manages have they have in the market. It's currently at 43% which is near the levels seen at ST bottoms of the past. A reading in the 20's would be more ideal to mark a longer term bottom though, but it's certainly near the the low end of the range.
Next the 10 DMA moving average of the put/call ratio. It sits at 1.03 which is high enough to warrant a ST bottom. We did see this get as high at 1.16 during last summers correction though.
Then there's the VIX. This is probably the only indicator that strongly supports the bears. It has remained rather muted which has many puzzled including me. I won't try to rationalize this one like some people are trying to. In my view it's not bullish that it remains this low and signals that there could still be one last little downside puke to mark the bottom of this slide (like say a sharp move to 1250 from here) or that if we did get a good rebound now, sometime later on in the summer we will go back to the lows of this move.
So in summary, we could be at or close to a bottom but it's likely not going to be "the" bottom that ends this consolidation phase I've been expecting. Having said that though, this looks very much like a correction and not the start of something more ominous and I don't expect to see the market go down more than 5% from here.
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