Mar 31, 2002

sentimenTrader.com

Sunday, March 31, 2002

It's somewhat difficult to read much into such a light volume week. We just suffered through the lowest volume week since the last week in December of last year, and even though we had a little fireworks with some economic releases, we ended the week flat in the S&P. It closed last Friday the 22nd at 1148.70 and closed this past week at 1147.39, with only a 22 point range in between. The Nasdaq 100 was contained within a 2.7% range last week, which is also quite tame. We did break down out of that 1150 - 1180 trading range I talked about last week, and it looks as though we're having some trouble getting back up through 1150. I also mentioned last week that we were entering a seasonally strong period (which should last maybe through the first few days of April), although it was hard to tell that last week.

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

BULLISH

BONDS - Broken record - bond yields continue 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 - This model has now spent quite a bit of time in bearish territory, although it just barely borders on extreme (around the 20 band). You should certainly know by now that I issued a SELL signal on Thursday morning with the S&P at 1153, but considering that fact that it was a somewhat weak signal, the volume was anemic and we're in a strong seasonal period, I only gave it one star. The three major components of the model (the .MR indicators which you can see to the left) are all modestly overbought, but again we don't have any extremes.

STEM - I covered the SELL signal in this model since it was headed back into neutral territory, but that again has reversed and we're close to entering bearish territory once again. If you look at the fast line (the 20-period moving average, which is the tan line on the chart), it has already entered bearish territory by dropping to the 20 band. The slow line is still in neutral territory, which tells us that the bullish sentiment seen recently hasn't been very persistent. It will take a few more days of bullish sentiment to really push this line down into the SELL zone.

AIM - With the improvement in the sentiment surveys, we have gone from a reading of just under 20 to a current reading of 32. Although it is still bearish, it has made a fairly dramatic jump out of danger territory. Quite frankly, I though we would see further deterioration in this model over the past week, but that didn't happen. In fact, I was thinking that we would get a better SELL signal out of this model this week, but it looks like that opportunity has passed. We will have to wait at least one more week to see how things shake out.

VIX and VXN - Same as last week - very low on the absolute levels, but showing no signs of a reversal at this point. We could see both of these indicators drop several more percentage points before becoming extremely worried about the absolute levels. Even so, they are both low right now, which suggests complacency or too much bullishness, which is just flat out bearish, no matter how you slice it. In fact, the VXN (the Nasdaq 100 equivalent of the VIX) closed at an all-time low on Thursday. This indicator has only been around for a year, however, so take that into consideration as well. I'm getting tired of repeating this, and you're probably sick of reading it, but continue to watch for a reversal in these indicators and don't act too soon simply because they're "low".

PUT/CALL RATIOS - This is a close one, that could have easily gone into the neutral camp. We haven't seen an inordiante amount of optimism from this indicator, which is a positive for the market, but the trend has still been down over the past few weeks - meaning more call contracts are being opened or less put contracts are. Nothing extreme here, which makes its usefulness to us at this point suspect. I would not try reading too much into it at this point.

COT - Once again, this indicator is flat-out, hands-down bearish. The small specs increased their record long position and the commercials increased their short position. If the commercials increase their shorts much more, they will also be at a record. You can see from the stochastics that we are at the most bearish position possbile - the commercials are at the zero line in the one year, six month and three month time frame while the small specs are at the opposite extreme in all three time frames. This situation can persist for quite some time before the market makes a move down (and a move down is NOT guaranteed), so the precise timing is a question mark. However, there is no denying that this is a very large negative for the market in general at this point. The small specs keep buying futures contracts long, and the commercials keep selling them to them to go short. It's no question who is profitable the vast majority of the time, so we need to align ourselves with who is usually "correct".

SENTIMENT SURVEYS - We had quite an improvement in the sentiment surveys last week. Remember that these surveys are reported with a week's delay, so that the numbers we're looking at this weekend cover a period that does not include the latest week. The latest week was rather disappointing from a bullish perspective, so we should see further improvement in these numbers next week. The AAII numbers went from the least number of bears in over a year to a reading only in the bottom 25% (at 23% bears). The Market Vane numbers improved from the bottom quartile to the bottom half, and the Consensus numbers improved just a bit to reach the top quartile. The II numbers still have not moved much. They've been relatively sedated for the past two months now. Although the numbers have improved considerably, I would still have to rate them as bearish. Even with some dips in the market, the bulls are not switching to the bear camp. If anything, they are simply expecting a correction at worst. In order to become more impressed with these surveys, I would have to see more bulls "give up". If they just expect a correction, then as the market continues down they will at some point throw in the towel, adding to the selling pressure. The way it stands now, it makes sense to say that the bulls have not sold their positions but are simply holding them as the correction ostensibly runs its course. But if so many are bullish, who's left to buy? This is particularly ominous when combined with the COT information.

NEWS ITEMS - We saw on Tuesday a much higher than expected consumer confidence number. Stocks initially rallied after the news, but could not sustain it. That is a classic sign of an exhausted market, although the low volume and holiday week may throw a wrench in the mix. Also, I would prefer to see this phenomenon at market highs instead of the middle of a trading range. There were also some positive divergences, such as potential terrorist attacks in Italy and increased (again) violence in Isreal/Palestine that were largely shaken off. So, this could go into the neutral camp, but the failure of the consumer confidence rally has me on the defensive. If this market is truly looking for an economic rebound to justify high stock prices, and an economic rebound is predicated upon increased consumer demand (corporate spending as well), then the market should be able to use a number like Tuesday's to justify a further rally. That did not happen.

BREADTH OSCILLATORS - Our breadth indicators came off of historic extremes, settled back down into a slightly oversold condition, and now are back near the top of their ranges. Although they can go considerably higher, as we saw several weeks ago, they do tend to turn down from their current levels, as the stocks making up the indicators become exhausted and pause or drop.

NEUTRAL

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.