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Coolhand's Market Analysis

Seasonality Remains Positive

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Even our bearish sentiment survey at 76% bulls was no match for seasonality and liquidity last week as some of the indexes continue to hit fresh all-time highs. This week, our sentiment survey continued to be overly bullish at 71% bulls and we had less bears in the survey at just 19%. It certainly seems that many traders and investors are becoming more aware of how much QE has meant to the stock market. Just looking at our auto-tracker for 2013 shows that trying to protect capital throughout the year has meant missing gains in the face of this bull market. There is no telling how much longer the market will continue to levitate either. There are many opinions throughout the media offering bullish and bearish cases (as usual), but it really is a guessing game how it all plays out. I personally do not believe the stock market is in a bubble. Valuations are largely fairly valued, with some stocks and funds overvalued to varying extents. So if this market is indeed going to be the next bubble, it would seem it has further to go to the upside. At least that is the way I see it.

Looking ahead to the new trading week, we have some interesting data as we begin the transition from 2013 to 2014.

Technical Difficulties-2013-top-50-trend-jpg

Not much change for the Top 50. They remain firmly bullish, maintaining a very high exposure to the stock market. Since the beginning of July, this group never held less than 86.8% stocks. Fully half (50%) of the Top 50 have not made one IFT the entire year. Without question, buy and hold was the winning formula in 2013.

Technical Difficulties-2013-total-tracker-trend-jpg

After increasing our collective stock exposure five weeks in a row, we had some significant profit taking last week. And if this reduction in stock exposure remains aligned with market character, the stock market should be higher by next Friday as indicated in the next chart.

Technical Difficulties-2013-total-tracker-png

An official signal was not triggered with the dip in stock allocations last week. It takes at least an 8% dip to get a buy signal. But we did come close with a drop of 7.46%. That may be enough. With the exception of four weeks this year (green shaded areas), the market has advanced whenever we have had a weekly dip in stock exposure. This won't go on forever, but as I said, if market character remains the same the market will likely be higher next week. And next Friday is the last official day of the Santa Claus rally window.

Technical Difficulties-spx-png

Price on the S&P 500 remains well above the cloud and the conversion (blue) and base (red) lines remain above the cloud. Same for the lagging line (green). These are bullish indicators. But we can also see that price is hitting upper trend line resistance. MACD is hinting at turning down and RSI is almost in an overbought condition. Will the index break out again as our reduction in stock exposure suggests? If it wasn't for liquidity, I'd be a bit bearish here.

Technical Difficulties-emw-png

The Wilshire 4500 is showing a similar situation with price hitting upper trend line resistance. MACD has not turned, but RSI is very near overbought.

So I am looking higher next week given positive seasonality, underlying market support and the profit taking across the auto-tracker. Sentiment is bearish and the indexes are extended and suggesting a pullback is near, however. But I am not expecting anything deep to the downside if we do get some weakness. Keep in mind too, that there will be a Fed Chair transition soon. The market could get very skittish as this time approaches.

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

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