We saw intraday breaks of both the April high and the ascending trendline in the Dow Transportation Index in the last two days, but it managed to close above them each time.  This is not a breakdown yet, but I am looking at it as a warning because...

The 58% bullish reading in the AAII Sentiment Survey is the highest since early 2007.  That is a concern, but it is interesting that the bearish percentage is not lower than 28%.  28% is low but we have seen much lower readings in the past.  The bull to bear ratio of 2.07 to is a concern as well, but we have seen much higher ratios during prior bull markets.

We are getting similar numbers in our survey.  The TSP Talk Sentiment Survey came it at 57% bulls, 34% bears for a 1.68 to 1 bulls to bears ratio.  That is a neutral reading in a bull market but it keeps the system on a sell signal for next week because of last week's 3 to 1 bulls to bears ratio.  The system is up 26.57% in 2010, and last week's sell signal appears to be another well timed move.

Here's that Sentimentrader.com Smart Money / Dumb Money Confidence indicator and it is now in pretty rough territory with the dumb money at 67 and the smart money at 33.  That 33 is actually up from the 29 reading just a couple of days ago.  When you start seeing ratios near 70/30 it is time start thinking about a pullback.

                                  
                                   Chart provided courtesy of www.sentimentrader.com

I have mentioned the smart money OEX put/call ratio indicator many times lately, and it has been telling us that they, the smart money, are extremely bullish, and that is unusual considering the magnitude of the current rally.  That information has stumped me.  The above chart kind of contradicts OEX put/call indicator so one may be skewed.  The above indicator is compiled by a series of indicators, whereas the put/call ratio is just one indicator.  I'd have have to give more credit to the multi-indicator reading.

I don't know if this market has any more rally left in it, but as know, markets tend to run longer than you might expect.  This one has already run longer than I expected.  This leaves us all with a tough decision.  Do we wait for the indices to breakdown and rollover, or should we step aside now while we can - before the trend breaks? 

If the market takes off from here we'd feel pretty frustrated selling near support, but if the market shoots down while we are still in the stocks funds, we'd feel pretty silly considering the warning signs.

There are rumors flying around about the White House conceding to extend all of the Bush tax cuts, but there is no confirmation.  I thought this would be good news to the market but the overnight futures didn't even react to the news, so maybe it is more rumor than anything else.  If it turns out to be true and the market does not rally, I will look at that as a sign of weakness for stocks.

I just rechecked the futures and they are now down sharply.  If this carries over into the open and holds into the close, it may be the nail in the coffin for the rising trend.  But bull markets don't usually end overnight.  We've had a few down days, but that doesn't mean the market won't throw some good days at us to try to fool us.  I really want to be bullish here considering the time of year, but I may have to sell the next push higher if we get it, and then see what develops.

Thanks for reading!  Have a great weekend!

Tom Crowley