Market Sentiment - Friday, July 28

The short-term market momentum is peaking.

 

Market breadth is weakening as shown by the bullish percents. These are still healthy levels, so I think it indicates short-term weakness, but it isn't a call for a larger market drop.

 

This index mirrors the general market, and when it is doing well I feel good about the market. But when it is selling off, I get concerned.

 

Sentiment

The number of newsletter writer bulls tallied by Investor's Intelligence (II), as reported this week by CNBC.com, is above 60%.

II notes that when the number of bulls reaches this level it is time to start getting cautious towards the market. 

From a contrarian point-of-view, a high percentage of bullish newsetter writes works against stock prices in the medium-term.

Another sentiment indicator is the American Association of Individual Investors survey. This survey has worked fairly well over the past couple years, although it is a little confusing at the moment.

The recent trend, using the 4-week average, hasn't followed the usual pattern of reaching a high a few weeks before the medium-term market peak. So, at the moment, this chart doesn't look to support the view that bullishness is peaking. But...

 

When you overlay the stochastic on the actual weekly data, it does give the impression that bullish sentiment is at an extreme. I don't know if this method is valid, but the stochastic has matched the market peaks fairly well.

 

As a reminder, the spikes in the VIX are some of the best opportunities to buy stocks if you have the courage. I don't always have the courage, and I often wait until the VIX starts to drop back down again before I buy aggressively.

 

The Leader List

Strong: Gold.  Weak: Home Construction, Consumer, Korea, Dividends, Mid Caps

 

Home Construction was never a ripping buy, but I liked this gradual move higher. Now, it is starting to under-perform a bit and it is no longer a leader.

 

Outlook

John Murphy has pointed out that it has been a year since the market has experienced a 5% correction so it is overdue for a pullback. He also mentioned that we are entering the risky time of the year for market corrections.
 

The long-term outlook is positive.
The medium-term trend is up. Watching for signs of a peak.
The short-term trend is down as of July-28.