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Sunday, March 24, 2002

Once again, not much change in the market and not much change in sentiment.  We are still stuck in a trading range between 1150 and 1180 (the spike down to 1139 was quickly corrected), and the sentiment indicators I follow are reflecting that trading range.  Although I am net bearish, as is obvious from the outline below, I continue to believe we could see higher prices over the coming week or two.  Seasonally, the trading day before Easter is positive, and we are also coming into quarter-end where insitutional players try to mark up their portfolios.  Don't let anyone tell you that doesn't happen because it does.  Those two factors alone make me hesitate on the short side, as they tend to be very powerful factors. 

Let's look at the rest of the picture...

BULLISH

BONDS - Same as last week - bond yields continue their march higher.  All signs point to a continued rise in yields, which should benefit stocks if the asset allocators are moving money out of bonds and into stocks to earn a higher yield.  At some point, though, those higher yields will have the opposite effect of making bonds more attractive, and prompting the asset allocators to move money from stocks and back into bonds.


BEARISH

STEM.MR - Our shortest-term model has been spending a lot of time in the bearish area over the past few days, without giving a clear SELL signal.  With another push up in the market, I'm quite sure we would see a signal fairly soon afterwards.  What we have been seeing is that we have gap up or gap down openings which usually triggers extreme readings for the first 1/2 hour, then they go back to normal.  Using 1/2 hourly data, there is not much time to issue even a one-star rated signal, as by the time the next 1/2 hour rolls around and the model gives a signal, most of the move has already been completed.  This model was not designed for daytrading, but that has presented about the only opportunity over the last few weeks.

STEM - Our other short-term model is also in the bearish camp, although that's somewhat iffy.  We are, of course, still on a SELL signal in this model from a couple of weeks ago, and there really is no reason to change that now.  The model is hovering around the neutral/bearish zone, and could really go either way at this point.  As I mentioned in one of the daily commentaries, it is coiling up into a triangle that usually results in an explosive move one way or the other.

AIM - Even a quick glance at the AIM model will show you we are in the danger zone of under 20.  This model is heavily influenced by the sentiment surveys (discussed below), which are not positive at this point.  We need to wait for a turn in this model before issuing a SELL signal, as we could go quite a bit lower (and higher in the market) before getting a good signal.

VIX - If you read any financial publications or listen to any broadcasts, you've no doubt heard all about how low the VIX is.  Yes, it is low, but it is also beginning to stretch away from its 10-day moving average and its RSI is becoming very low.  Typically when we reach an RSI of around 22, where we are now, that has corresponded with turning points in the VIX (and broader market averages).  I watch these measures much more closely than the absolute level, because the absolute level means close to nothing.  As the mean value of the VIX gets stretched lower, it forms new trading ranges around that mean.  When it gets too far from the mean in either direction, REGARDLESS OF WHAT THE ABSOLUTE VALUE IS, it gives us a hint that we may be near a turning point.  I'm not saying that the absolute level of under 20 is not significant, but I am trying to impress upon you to not get transfixed by the low levels.  Watch the 10% envelope and the RSI, and you will be in much better stead than those that go short just because we're under 20.  If you are worred about a possible drop in the market, with implied volatility levels so low, you should look at buying put options, as options are very "cheap" right now.

PUT/CALL RATIOS - These are not exceedingly bearish, but they are certainly not bullish and I would say they are more bearish than neutral.  The CBOE put/call ratio and open interest put/call ratio have been hanging around their lower and upper trading ranges, respectively, for the past week.  While not giving any particularly extreme readings recently, they are suggesting complacency.  The other option indicators I follow are suggesting the same - not extreme, but more bearish than neutral.  On Friday morning, we saw an aggresive amount of call buying at the open, which persisted for much of the morning.  We saw it again near the close.  Options traders continue to buy calls before the market closes, apparently continuing to hope for those gap up openings.

COT - The commercial/small spec net positions situation remains outright bearish.  The commercials were reported to have no change to their net short position, while the small specs reduced their net longs by a small amount.  These readings continue to be near historic extremes and is the biggest sentiment-related negative against the market right now.

SENTIMENT SURVEYS - This week we saw the AAII level of bears shrink to the lowest level in at least a year, at 11%.  That is extremely low, even for this notoriously noisy survey.  I watch the percentage of bulls to bears more than the levels themselves, and at 83% (53% bulls and 11% bears = 83% bulls), it is the most bullish (bearish to us) it has been in over a year.  The other surveys did not have much change, but they still remain bearish.


NEUTRAL

NEWS ITEMS - The market is responding as it should to economic and company-specific news.  The market has been dropping on negative news and rising on good news, which is what one would expect when in a trading range like we are.  If/when the market stops responding normally, that will give us a clue as to what the perceptions of market participants are.

BREADTH OSCILLATORS - The breadth oscillators have completely worked off their overbought nature without much damage to the market.  This should be considered bullish, but they are not at a level now where I would consider them to be a positive.

TRIN - Both the absolute level and the .MR level of the TRIN are firmly in neutral territory.  This is a fairly erratic indicator, though, so that could change in an instant.  We have not seen any real extremes in this indicator last for more than an hour or two over the past week.

I have the same view as I did last week and the week before.  We could (should???) see a move higher over the coming days and weeks, thus setting up a good shorting possibility.  I think the coming week may be fairly quiet, but with an upside bias as explained above.