Big week. Maybe
some answers.
Last week was very positive for stocks, closing the week with a bang -
back to back ninety plus point gains for the Dow. But
interestingly, the S&P 500 did not gain back the entire loss of the
prior Friday's sell off, the day the Dow was down over 200 points.
The next couple of days will be quite significant. I doubt the
market will be too volatile leading up to the Tuesday Fed meeting where
the interest rate decision and forward looking bias for the market will
be given at 2:15 PM ET.
If you have followed the market over the years you know these meetings
can have a major impact on stocks and you also know that the market does
not always move in the direction you might think. We've seen
markets rally after rate hikes and sell off after decreases, you never
know. Sometimes the market could move sharply in one direction
after the announcement, only to do a complete turnaround a day or two
later.
Many short term indicators are moving toward overbought but nothing too
extreme yet. I see some neutral intermediate term indicators but
sentiment (part of psychology leg) still seems too bullish to keep a
rally going much longer.
The chart below from
sentimentrader.com shows a three-year average of the bullish ratio in
the Investor's Intelligence survey. Approaching 70% now, we've only
seen levels this high twice before in the past 37 years. In 1977, the
S&P lost 14% of its value over the next six months. In 1987, it lost
nearly 30%.
Chart provided courtesy of
www.sentimentrader.com
It isn't
just this one survey. Both the Consensus and Market Vane polls have
shown bullish sentiment over an extended time that has only one
precedent over the past 20 years, which was April 1998. Despite a brief
sprint in July of that year, the S&P ended up losing 13% from its April
prices within six months.
Jason Goepfert of sentimentrader.com says, "This type of extended run of
bullish opinion is worrisome in and of itself, but what is most
concerning is that so many are writing it off as being different this
time."
In the short term, anything can happen. Particularly with the Fed
meeting and more earnings reports being released. I continue to
see the signs of a market that needs a rest, but it continues to mock me
making the call seem foolish. I know many of you have made some
good money over the past few months staying aggressive, so I don't wish
for anyone to lose money. But I am looking forward to a better
buying opportunity that and will mean losses for those aggressive
accounts. It may not come today. It may not come in the next
week or so, but it will come.
I realize in hindsight that I have been way too conservative the past
few months. But don't let yourself get too complacent. It's
easy to analyze the market from the left side of the charts. It's
the information off the right side of the stock charts that is the
unknown and we are left to make decisions based on the information we
have.
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