Weekly Sentiment Report: SP500 Notches New Highs

Introduction

7 weeks ago, our “dumb money” indicator (see figure 1 below) dipped its toe into the extreme pessimism range after the markets (i.e., SP500) sold off only modestly (<5%).  Since that single week extreme reading which was not a buy signal by our measures, the SP500 is up nearly 3%.  The pullback on the way down wasn’t horrific by any means, and consequently, the bounce back shouldn’t occur with any great alacrity.  But here we are with the SP500 notching new highs nearly everyday.  Despite this we are still inclined to call this a NEUTRAL market environment, where the highs should be sold and where the dips should be bought, and as the sentiment indicators have a bullish skew, we don’t expect the downside to be too probing.  After all, investors want in to this market, and so this should keep the sell offs relatively shallow.

But then again, a market that doesn’t sell off and clear the weak hands is a market built on a poor foundation.  This would describe the current dip buying in this market.  On our measures, the last oversold reading in the SP500 on a 60 minute time frame occurred nearly 2 months ago.  The last oversold time frame on the daily charts was in February.  Markets need to sell off just as humans need to exhale once in a while!!  All this urgent dip buying following very shallow sell offs is more consistent with a market top because this is what happens at market tops.  A weekly close below SP500 1848 would be consistent with a market top.  The SP500 is currently 4% above this important support level.

In summary, the SP500 is at new highs, and it got here on lackluster, low volume price action.  Summer is approaching.  The sentiment indicators have a bullish skew.  We still stand by our NEUTRAL market call. We just don’t believe there is any real great edge especially with prices at new highs.

Dumb Money/ Smart Money

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