Coolhand's Market Analysis

It's been a bit of a roller coaster in the indexes the past few weeks and we are about to head into the holidays soon. Seasonality is positive this time of year, and as most of us are quite aware there are numerous political/economic issues weighing on investors and traders alike. So it's difficult to focus on the historical perspective. In such a situation we tend to look for other indications that may give us a clue about market direction.

A few weeks ago I was asked whether I'd noticed a "tipping" point just before markets pull back. So I did some statistical digging using this year's tracker charts and had some interesting observations. In particular, I noticed that when the Top 50 drop their collective stock exposure by more than 10%, the market tends to rally that week. Here's what I said about that a few weeks ago:

"The Top 50 had a bearish stock shift of more than 10% twelve (12) times this year. Out of those twelve times, they were correct only three (3) times. That means they were correct only 25% of the time when they got bearish more than 10%.

Of the three times they were correct, the market dropped -2.78%. But (and this is a bit revealing) when they were wrong on a bearish shift of more than 10%, the market was up an impressive 16.5% over those nine (9) weeks."

Well, we have another bearish shift from the Top 50 this week. Their collective stock exposure dropped 13.6%. That's the 13th time this year they've had a bearish shift greater than 10% and they are only batting .250 in this situation. In other words, there's about a 75% chance we rally this week. It doesn't have to rally all week, just enough to end the week in positive territory.

So if you're looking for more justification to hold stock positions, this may help.

Here's this week's charts:




You can see the drop in stock allocations along with the corresponding rise in cash and bond holdings this week. Total stock allocations for the Top 50 are now just 41.9%.




The Total Tracker saw a modest rise in stock allocations this week, moving higher by 1.89% to a total stock allocation of 48.64%.

So both groups are below 50% in stock allocations, our sentiment survey is on a buy for the new week, and the Top 50 have gotten bearish enough in the short term to tip the odds of a rally in the bull's favor.



On the technical front, the S&P 500 chart looks okay for the moment (albeit a bit dicey), and I'd not be surprised by a bit more selling to scare more bulls out of position. If that weakness comes early in the week, perhaps we'll see a rally as we head into the latter part of the week.