Underlying Market Support Delivers Again
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, 12-22-2013 at 04:03 PM (6634 Views)
It was a bit of a toss up last week to know where the indexes would end up by Friday as strong (positive) seasonality was tempered by fairly bullish sentiment. Early on, the indexes did start out under a bit of pressure. But mid-week came the FOMC announcement. And it was probably the last one that Mr. Bernanke would give. It was expected that "tapering" might begin and that was partly what the market was looking for some clarity on. So when it was announced that tapering would begin by cutting bond purchases by $10B per month with rates likely to stay a ultra low levels for the foreseeable future, the market rallied hard. As if on cue, underlying market support spiked on the news. It's like watching "professional" wrestling. It's scripted, but no one knows exactly what to expect. Well, in this case the bears got pinned to the floor. Something they should be getting used to by now.
This week, we have some seriously bullish sentiment to deal with as our survey came in at 76% bulls. And I am anticipating that it will deliver some degree of weakness. Seasonality is still very positive, but I can't ignore that underlying market support was robust at week's end on Friday either. Sooner or later there will be some profit taking even if it isn't this coming week. We'll just have to see how it plays out this year, as last year at this time the market sold off.
Here's some data going back four years that shows how the market performed going into the holidays and through seasonally positive January. The arrow shows last year at this time and you can see how hard the market fell that week. Underlying market support was not nearly as robust though. But that is not a guarantee that current levels will stay elevated next week either. The yellow fields are a good comparison as both sentiment and total stock exposure were very similar. The market was weak in 2011, although the I fund managed a nice gain. The light red areas show weekly losses for those weeks.
The Top 50 has remained very bullish for weeks now.
The Total Tracker (Auto-Tracker) showed more stock buying for the fifth week in a row. This goes hand in hand with seasonality I'm sure, but at some point there will be some profit taking. It could be this week according to our sentiment survey.
I have been saying there has not been much damage to the technical indicators of the S&P 500 in spite of the modest short term weakness early on the previous week. Now it’s sitting at fresh all-time highs. Price remains well above the cloud, while the conversion (blue) and base (red) lines remain above the cloud as well. Same for the lagging line (green). These are bullish indicators. MACD and RSI are rising again. But don’t get complacent on the bullish picture painted here. It’s a Fed fueled market and as such can go the other way when we are not expecting it. I am not trying to be bearish, I just prefer to temper expectations. Emotion is what gets us in trouble and I like to try and keep mine as level as possible. For now, I will take it at face value and lean bullish longer term.
Price for EFA (similar to the I fund) broke above the cloud. That’s bullish. But the conversion line has not yet had a positive cross through the base line, so the chart is not entirely bullish. MACD and RSI look to be turning back up and that’s obviously a positive.
So I am anticipating some weakness this week given sentiment. But I cannot get too bearish given the support this market is receiving. Perhaps we will just see chop next week. A little further out, there is a Fed transition coming and that may precipitate some weakness in the weeks ahead.
To see this week's full analysis, follow this link TSP Talk Members' Home Page
The Christmas holiday is upon us. A time to reflect on what is really important in our lives. I wish each of you a safe and happy holiday.