TSP Talk – Stocks Going Up… Until They Don’t

Good morning. It is your weekly dose of TSP Talk.

The indices were mixed on expiration Friday as the Dow and the I-fund were basically flat on the day, the S&P 500 gained 0.50%, and the small caps gained 1.0%.

Like the title of this article says, it looks like the S&P 500 is going to go up, until it doesn’t. Just like the relentless selling in February ended with a break to the upside of it’s sharp descending trend, this rally will likely end once the upside trendline is penetrated to the downside.

On March 11th, the S&P 500 broke a month long steep downtrend, following that huge one day gain of 7% on March 10th. That probably should have been a warning sign for the bears, but many of us had been holding on to the “sell the rallies” in a bear market mantra, so we missed it.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

By the 12th of March, the S&P 500 had climbed about 10% off the low and we started to say that even if this rally is for real, it may be too late to chase. So we waited. And waited. And the market continued to rally, as is usually the case when the bearish percentages are so high. If you remember, the bear percentage on the AAII Sentiment Survey had just reached 70%.

The rally has now been going on for about 6-weeks and will likely continue until, well, until it doesn’t. I’ll be on the lookout for a break below the rising trend, which is currently sitting near the 860 area. There also some support near 830.

The bearish percentage on the AAII Survey (dumb money), which as I said was 70% in early March, is now 36%. The bullish percentage is at 44%, and while that level was trouble for the market in November and January, we’ve seen that level hit twice during the current rally and there has been little affect.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

The Wall Street Sentiment Survey (below), which is a smart money survey and not used as a contrarian indicator like the other sentiment surveys, is looking at a bullish percentage of 11%, one of the lowest readings is a couple of years, and a bearish percentage of 67%, the highest since 2006. This tells us that some of the smarter traders are about done riding this rally.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

The SentimenTrader.com Smart / Dumb Money Confidence indicator is now seeing the dumb money moving above that important 60% sell signal level, all the way to 67%. At the same time the smart money confidence level has dropped to 42%. Usually a move below 40% is part of a strong sell signal, but you can see that this 42% reading is the lowest level for the smart money since mid-2007.

Chart provided courtesy of www.sentimentrader.com

The market seems to like to move in one direction or the other, a little more than would seem reasonable before reversing. When that happens, I turn to sentiment more than any other indicator because we know that “the herd”, the “dumb money”, whatever you like to call it, tends to be the most wrong at extremes. Like I said above, the 70% bearish reading in the AAII survey back in early March is a great example. I mentioned it back then, but failed to act on it because I (being part of the dumb money) thought maybe “things were different this time”. Famous last words.

So we are seeing definite signs that this rally is getting a little long in the tooth, but the fact is the market is going to go up – until it doesn’t. You can play defense based on the extreme readings we are seeing, or you can wait for a breakdown in the uptrend.

The above is speaking to the traders or timers out there. The buy and holders are going to do their thing. I sure wish I made the gains they made over the last six weeks, but unfortunately for them, I have a feeling they’ll be giving a lot of that back in the coming weeks and months.

Scribbler’s TSP & Economic Report: The free trial continues through the end of April. A new report has been posted Monday morning. Please click here for more information.

That’s all for today. Thanks for reading! This market commentary is updated daily on www.TSPtalk.com.

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