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Coolhand's Market Analysis

Bullish Sentiment Delivers Weakness

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We have had some pretty bullish sentiment readings from our TSP Talk sentiment survey the past few weeks and for the most part they did result in short term weakness in the market the following week. Last week, the survey came in at 62% bulls and 29% bears and as I anticipated, we got some weakness of it, although with the exception of the I fund, it wasn't very deep. And it took several trading days just for the C and S funds to shed a bit more than 1% before Friday's rally, which erased the bulk of the losses in the S fund and left the C fund flat for the week.

You should already know the reason for the limited downside. Liquidity. It remains fairly strong. It won't always be that way of course, but when it is, it can often put a floor under price.

We go into the new trading week in much the same situation, except our sentiment survey backed off its high bullish level to a more moderate one at 53% bulls and 37% bears. AAII had a dip in bullishness too. This is good news for the bulls. Especially since seasonality is getting more positive.

Let's look at some charts:

Today-2013-top-50-trend-jpg

No signal from the Top 50 this week. For the new trading week, total stock allocations remained at 97.88%. High stock exposure in a high liquidity market has been the key to success in 2013.

Today-2013-total-tracker-trend-jpg

It really shouldn't be a surprise to see stock allocations climb 5.45% last week from a total stock allocation of 52.59% to 58.04%. With seasonality getting more positive it makes sense to take more stock exposure. Keeping something on the sidelines isn't a bad idea either as this is a good time of year to catch bulls off guard. If we get any surprises to the downside, that sideline money is available to buy it.

Today-spx-png

Resilience. That's what this chart is saying. Last week's weakness seemed worse than it actually was, but price bounce off short term support, which is where the last dip reversed. Momentum has been tracking sideways mostly and Friday's rally may have turned it back up again, although it's too early to be sure. I would not be surprised by another test of the lows next week.

Today-emw-png

I like to mix up my technical charts a bit so we can see more than one perspective. Here, we can see EMW closed right at resistance. Momentum is largely flat, but price is still tracking along that rising trend support line. Support and resistance are about to converge, so we'll have to get a break in one direction or the other fairly soon. It does not have to be dramatic. I'd like to see price break to the downside and cross below support and maybe even the 50 day moving average. That may bring out the bears again and possibly set up a good buying opportunity. But that's just what I'd like to see. We could just melt up too.

Today-tnx-png

Since the talking heads have to have something to point to when the market does what it does on any given day, I'm thinking that the rising yield on the 10 Year Note would make a great talking point should the market indeed fall through support on weakness. Friday's rally would seem to suggest the market isn't concerned, but concerned or not it can be used as an excuse to take price back down again. I am just throwing that out there as a possibility. I am not concerned about interest rates at this time by themselves.

So the charts remain bullish. Sentiment is not as bulled up as it was, which is a positive. Seasonality (January Effect) is almost at hand. Underlying support thus far has remained in place. These are all positives for the market. I am looking for weakness, even if only token weakness, earlier in the week, but expect the market to be higher by week's end. The key remains underlying support for this market. As it goes, so goes the market.

To see this week's full analysis, follow this link TSP Talk Members' Home Page

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Updated 12-08-2013 at 01:41 PM by coolhand

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Comments

  1. FireWeatherMet's Avatar
    Thats a pretty strong divergence of stocks vs cash/bonds in our entire Tracker. Hasn't come close to 60% stocks in many months.

    I'm a bit more fearful now that perhaps it was a very valid Sentiment Survey Sell signal, and that last weeks little dip was just a sign of a sharper profit tacking dip to come soon. If it weren't for seasonality, I'd be out for sure right now.
  2. coolhand's Avatar
    Quote Originally Posted by FireWeatherMet
    Thats a pretty strong divergence of stocks vs cash/bonds in our entire Tracker. Hasn't come close to 60% stocks in many months.

    I'm a bit more fearful now that perhaps it was a very valid Sentiment Survey Sell signal, and that last weeks little dip was just a sign of a sharper profit tacking dip to come soon. If it weren't for seasonality, I'd be out for sure right now.
    More than anything else, this is a liquidity driven market. And for all the talk about tapering and the end of QE, I have a hard time seeing them doing anything that would tip the market back towards recession again. But that's a guessing game at best.

    The 58% stock exposure is not really bearish in my opinion. It shows many folks are still very much measured in how much risk they are willing to take. And that goes for a lot of pros too. Liquidity does not substitute for solid fundamentals. And bullish sentiment in this market can be fleeting with enough downside pressure. I just don't see a longer term top at this point given the cautious nature of traders and investors.

    You are correct about seasonality. It shouldn't be ignored and we should take some degree of risk this time of year. But keeping some powder dry would be prudent too. It gives us more flexibility. Being willing to endure some volatility is necessary too.
  3. buffalobull's Avatar
    Hey Coolhand, have always benefited and appreciated your commentary.
    Would you be adding to or establishing a position (if one didn't have one) in PPL and SO given the declines today - around 1.2%?

    Thanks
  4. coolhand's Avatar
    Quote Originally Posted by buffalobull
    Hey Coolhand, have always benefited and appreciated your commentary.
    Would you be adding to or establishing a position (if one didn't have one) in PPL and SO given the declines today - around 1.2%?

    Thanks
    Hello buffalobull,

    I'm very happy you have found my commentary beneficial. Thanks for that.

    I own both PPL and SO. Currently, I don't have the capital to increase my position in either, mostly because I am also trying to diversify. But today's prices are lower than my entry points from earlier in the year. I like utilities because they generally produce regular dividends that may increase over time and are relatively stable companies. These two currently have a yield of 4.89% and 4.95% respectively. Both companies also have good growth potential. But they are also in a regulated sector and their profitability can be affected (positively or negatively) by regulatory decisions. But they are two of my core holdings and I expect to own them for some time.

    Technically, both are near multi-month lows. They remain in intermediate term downtrends, but mostly they have been trading sideways for several months. The sector in general could continue to see downside pressure in the months ahead, but that's not an easy call to make. As a dividend investor, I try not to get too concerned about "the" bottom and focus on buying stocks at reasonable valuation. I do sometimes ease into a position just in case a stock does move lower. That way I can dollar cost average at lower prices, which usually increases the yield I receive in dividends as well.

    Hope that wasn't more information than you were looking for, but I'm sure others are interested in understanding a bit more about my investing philosophy. I am not generally a short term trader.
  5. buffalobull's Avatar
    Perfect and thank you very much for that. I am very much aligned with your approach/views, learned much from reading your analysis and look forward to the details of your service when it becomes a paid subscription.

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