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Coolhand's Market Analysis

Underlying Market Support Delivers Again

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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.

Interesting Fact-sentiment-stock-exp-png

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.

Interesting Fact-2013-top-50-trend-jpg

The Top 50 has remained very bullish for weeks now.

Interesting Fact-2013-total-tracker-trend-jpg

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.

Interesting Fact-spx-png

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.

Interesting Fact-efa-png

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.

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Comments

  1. MrJohnRoss's Avatar
    "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."

    OMG Jim, that's just classic. Well done.

    JR
  2. moe1joe2's Avatar
    Newbie here

    Can you explain why 76% bullish sentiment with higher stock exposure means a bearish reading?

    Thanks in advance
  3. coolhand's Avatar
    Quote Originally Posted by moe1joe2
    Newbie here

    Can you explain why 76% bullish sentiment with higher stock exposure means a bearish reading?

    Thanks in advance
    Sentiment by itself is one of the tools that many traders and investors use to assess market risk. It is an important measure and there are numerous financial organizations that conduct their own surveys. You can also think of it as money flows. When folks are bullish, they are buying. When they are bearish, they are selling. The big money often exploits these set-ups by taking the market higher or lower depending on sentiment readings. So when sentiment gets too bullish or bearish the market often goes the opposite way. It's not a perfect science, but is one of many tools that can be used in risk management.

    The higher stock exposure as used in the context here is the dip buying that I am seeing across the auto-tracker. That goes hand in hand with the bullish sentiment in this case. We can see that sentiment being bullish really is causing folks to buy stocks.

    The bearish reading for sentiment in this case is generally only good for a week or so, give or take a few days. Because sentiment (emotion) changes with the market action.

S&P500 (C Fund) (delayed)

(Stockcharts.com Real-time)
DWCPF (S Fund) (delayed)

(Stockcharts.com Real-time)
EFA (I Fund) (delayed)

(Stockcharts.com Real-time)
BND (F Fund) (delayed)

(Stockcharts.com Real-time)

Yahoo Finance Realtime TSP Fund Tracking Index Quotes