EC A Monday Dirty Dozen

Opinion is like a pendulum and obeys the same laws ~ Arthur Schopenhauer

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at technical and sentiment indicators showing short-term overbought levels in US equities, incredibly low hedge fund exposure to stocks, the ‘pain points’ for CTAs in bonds, really cheap European banks and more. Here we go…

1. We saw the bullish thrust in stocks that we were expecting but now things are overstretched and odds are we see a slight pullback in the coming week(s) before the next leg higher, though we can’t rule out the possibility of a short FOMO pop higher either. Dow Transports (IYT), Russell Small-caps (IWM), S&P 500 (SPY), and Semis (SMH) are all knocking on significant resistance on a weekly timeframe.

2. Supporting the above, my short-term indicators for overbought/oversold technicals and sentiment show that the market is going to need a breather soon. The 3-day MA of Calls/Puts (thin red line) is beginning to signal complacency and 14-day RSI is becoming stretched.

3. Nomura’s Equity Market Sentiment Index is also showing that sentiment has quickly flipped from uber-bearish to bullish in the US — too quickly for my liking and tells me that we’re likely to see a bumpy trend higher or another severe washout to cement enough pessimism for a smooth run-up. Also, check out Japan. Its bullish sentiment is over the 2 sigma level. I wrote the other week (link here) about why I’m bullish Japanese stocks but, like the US, it’s technically overbought and sentiment is a little too hot. Gotta wait for a pullback.

4. Here’s the average pattern of Nomura’s global equity sentiment index following a drop below the -1 sigma level. If we follow the historical pattern then we should see sentiment flip over on September 20th.

5. I’m bullish looking out past 1-2 weeks and one of the BIG reasons is positioning, which I’ve been noting nearly weekly here in these pages over the last month. Here’s a great chart from Sentiment Trader showing that hedge funds are grossly under positioned considering the macro backdrop. That’s a LOT of fuel for the next leg higher.

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Disclaimer: All statements are solely opinions and are for educational purposes only.

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