Seasonality, sentiment, and oversold
The
market... terrible. Economy... a mess. Sentiment...
woeful. Maybe that means it's time for a little rally?
After Wednesday and Thursday's drubbing,
stocks put together a huge rally in the last hour of trading on
Friday after Obama selected Timothy Geithner as the new Treasury
Secretary.
In a normal market environment, these type of Friday afternoon reversals tend to carry into Monday
morning, but a large gap opening isn't usually a recipe for lasting
gains. The market would be better off opening flat or slightly
lower. If
it does gap open higher, it would probably be best to see the gap
filled before it moves higher again. It is a post-options
expiration week, which gives it a negative bias. One thing is almost certain;
volatility will be high so we should see the market change
directions often this week.
The NYSE overbought/oversold indicator hit that -1500 level again
after Thursday's trading, nearly matching the extreme oversold
readings
it saw in October. At least a short-term bounce is
expected, and we saw the start of that late Friday.
Chart provided courtesy of
www.decisionpoint.com
The S&P 500
rallied late on Friday but it did not quite get back all of the
losses it incurred on Thursday. The overhead resistance is
near the 840 level, then the 20-day moving average which is
currently near 884.
Chart provided courtesy of
www.decisionpoint.com
The MACD indicator
may be better suited for this trending market, which we are in now,
as opposed to the overbought/oversold indicators best used in an
oscillating market. The MACD can sniff out divergences just
before market turns.
When the MACD makes higher lows or higher highs, and the index is
flat or moving lower, it is a divergence that can lead to high
prices - marked "A1" above.
When the MACD makes is relatively flat and the index moving down, it
is also divergence that can lead to high prices - marked "A2"
above.
When the MACD makes lower lows or lower highs, and the index is
moving higher, it is a divergence that can lead to lower prices -
marked "B" above.
We just came out of a period of lower prices while the MACD is
making a higher low - marked "A3" above. This is a divergence that can indicate
that a short-term bounce is possible in the coming days/weeks.
The AAII Investor Sentiment Survey came in at 24% bulls, 57% bears,
making a very bearish 0.42 to bulls to bears ratio. The last
time we saw a reading that bearish was in July where we saw the S&P
500 rally for few weeks before the next leg down started.
Chart provided courtesy of
www.decisionpoint.com
The Smart Money / Dumb Money Condidence indicator on
www.sentimentrader.com
saw the dumb money indicator move down to 13, near the all time
lows. The smart money indicator moved above 70. When the
smart money is above 60, and the dumb money is below 40, we usually
have a decent short-term buying opportunity.
Chart provided courtesy of
www.sentimentrader.com
Once again, here is the Thanksgiving seasonality chart.
Chart provided courtesy of
www.sentimentrader.com
Combine this data
with the November seasonality chart below, and this is usually a
pretty good week to be in stocks. But this is no ordinary year
and sentiment would be pretty low on my list of indicators right
now.
I know I am sounding bullish, but this is just for the short-term.
We are in a big, bad bear market and caution and capital
preservation should be at the top of your lists. Those looking
to take on risk may have an opportunity. Those looking to play
it safe, may not want to get involved, and I don't blame you.
I don't see any reason to say we have seen THE bottom, but we still
may see a little pop in the coming days or weeks.
I would be a seller
of any 10% to 15% rally.
That's all for today.
Thanks for reading,
and we'll see you tomorrow!
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