The Dow has now risen nearly 500 points the S&P 500 is up 4.7% since mid-April. The concern now is, how much more upside is there? My guess based on sentiment indicators is another 4 or 6 weeks.
Using the short term the overbought/oversold indicator, I see a similar scenario. The trend in this indicator has definitely gone from a downward slope to an upward slope. It obviously follows the direction of the market. So how do we know when to get cautious? Extreme overbought readings come near 750 (see blue graph) ...
Chart provided courtesy of www.decisionpoint.com
The ob/os indicator is currently at 384 so thre is room to go up, but 750 is on the horizon . But if you look at those red vertical lines I drew above, you can see that even when the indicator hits 750, the rally does not typically stop. The market continues up for a few more weeks. Of course there are several other indicators to consider, but this one I particularly keep an eye on.
Investors did
get a little more bullish last week as the AAII Investor Sentiment
Survey shows 39% polled being bullish, and 29% bearish. This
is a neutral reading for us and we would start getting more cautious
when this ratio is over 2 to 1, bulls to bears. These polls
tell us what investors are saying. But what are they actually
doing?...
Investors pulled $433 million out of equity mutual funds in the week
ended Thursday. That is the sixth-largest outflow in the past year.
Extreme fund flows tend to be a decent contrary indicator. The five
outflows larger than the current one resulted in a higher market in
the S&P 500 the next week 4 out of 5 times, with an average gain of
15 points. The only loser saw the S&P decline just 3 points over the
next week. Even more unusual, it is the first time in 2 ½ years that
investors pulled more than $100 million from equity funds during a
week in which the S&P had gained more than 20 points – usually net
redemptions are seen when the market declines. Over the past three
years, whenever investors pulled more than $100 million from funds
during a week when the S&P gained at least 20 points, the next week
the S&P was higher 3 out of 4 times with an average change of +17
points. The sole loser was a negligible loss of 0.8 points.
So we see that people are saying they are getting more bullish, yet
they are still acting cautiously. That is good for the market.
On Friday I pulled the 15% I had in the I fund and put it in the S
fund. The trend on the dollar has turned up and the I fund,
while not a terrible investment, could see some resistance if that
trend continues. I prefer U.S. stocks for now.
That's all for today. Currently 65% C,
35% S fund. Until next time...
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