Jan 27, 2002

sentimenTrader.com

Sunday, January 27, 2002

This week’s commentary will be short, and for that I apologize. We will get into a more in-depth discussion next week.

We must be extremely cautious if thinking about any new long positions this week. At this point, all three of our published models are on sell signals, and two of them (STEM.MR and AIM) were quite strong. STEM gave a mild sell signal, followed by the possibility of a buy signal (just touching the 70 area) a few days later. We did not take that buy signal, so we are still in sell mode from the 1135 area for that model. Although the extreme readings we have seen in the past few weeks have been alleviated somewhat by the sideways nature of the market, we believe we are still susceptible to a sustained decline, with the distinct possibility of a severe sell-off. One measure that gets discussed ad nauseam is the VIX. Although we take a bit of a different look at the VIX, we still look at the absolute level. At 21 and change, it does not bode well. Although we could see it decline further, any move above 22.50 would signal to us that a sell-off is not only possible, it is probable.

Sentiment in the news media is becoming more skeptical of a sustained rally, which is bullish. We suspect we will see the advisor and investor sentiment readings come down substantially at the hint of a market decline. Although we don’t expect an AIM buy signal any time soon, the overwhelming bullish sentiment of a few weeks ago has been alleviated.

For the coming week, we expect the 1140 level in the S&P to be major resistance. If the market can get above that, we may have a minor rally, but I wouldn’t expect fireworks. If we do get fireworks, we would expect them on the downside and are prepared for such. Possible support is at the 1115 level, then 1000. If we get to those levels this week, I would expect a STEM.MR buy signal at some point for a quick rebound, and possibly a STEM signal portending the sell-off has temporarily run its course.