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Sunday, April 14, 2002

As I have been suggesting over the past week in the daily commentaries, I was becoming more and more bullish as the market dropped.  We have now gotten to a point where I see the odds of a rally much greater than those of a decline.  You should be able to see from the past weekly commentaries that I have been net bearish since early March, but the tides have turned as we now have several pieces in place for us to be able to expect a rally from these levels.

Let's look at them one by one...

BULLISH

TRIN - We have seen excessive selling in a concentrated number of shares over the past month, which has driven both the NYSE and Nasdaq TRIN to the very upper ends of their ranges (including the moving averages).  The 10-day moving average of the NYSE TRIN has reached 1.6.  A reading of 1.5 is commonly considered extremely oversold and a very bullish signal.  That signal has worked very well the past four times it occurred, which was September/October of 1998, March of 2001, September of 2001 and January of this year.  Every time it preceded impressive intermediate-term rallies in the stock markets.

CBOE PUT/CALL AND OPEN INTEREST PUT/CALL - This is an interesting one this week.  Only a few times has the open interest put/call ratio been below the put/call ratio itself.  It doesn't mean anything just taken by itself, but it does point out extremes in the indicators.  On Friday, the put/call ratio reached .99 while the open interest ratio was .86.  That put/call reading is in the 95th percentile over the past year, while the open interest ratio is in the bottom 6th percentile - both of which should be very bullish to us.  The last three times this happened was - as you probably guessed by now - April of 2001, September of 2001 and January of this year.  There are a couple of things that make me pause a bit about these readings on Friday.  One is that option expiration is next week, and the games played around that event seem to be played earlier and earlier nowadays, so that may have had something of an effect.  Also, the Mideast situation is very tenuous and with the bombing in Jerusalem on Friday, I'm quite certain a lot of traders wanted to take protection home for the weekend in case things got worse.  So I think those two factors may have at least a little bit of artificial influence on these numbers.  However, they are still outright bullish.

AIM - While currently giving a reading of 66 (which is on the upper end of neutral) and not necessarily in bullish territory, this model has made a substantial swing in only a couple of weeks.  That in itself is very bullish, as it shows there was a quick reversal of optimism.  That typically happens with sharp spikes down in the market and not the slow grind we have had, but it may show that the average investor has thrown in the towel and given up on any hopes for a quick rebound.

SENTIMENT SURVEYS - It seems odd to me to actually highlight this one green instead of red, since it's been bearish for so long, but we have turned the bend (not completely, but we're getting there).  I want to point out the AAII numbers in particular.  If you've been reading the commentaries, you should know by now that I don't place a whole lot of weight in this survey since it bounces around so much.  However, the latest survey shows the greatest level of bearishness since April 2001, July 2001, September 2001 and November 2001.  All of those occurrences preceded good rallies, although the July one was quite short.  At 28% bulls and 33% bears, we are at quite an extreme in this survey which is why I think it's noteworthy.  We are also in the upper 70th percentile in the Market Vane survey and the upper 80th percentile in the Consensus survey.  The II numbers didn't come in as much, which is somewhat bothersome, but since the other surveys have made such a turnaround, I think we can consider the overall level of sentiment quite bearish (bullish to us).  I believe the action over the past week should drive the numbers even lower, perhaps substantially, which of course is bullish for the market.

VIX and VXN - Over the past week, we saw some positive action in this indicator, particularly on Friday.  It spiked up to the 10% envelope, then reversed and closed lower.  That is often a very good indication of a pending market rally, although it is quite short-term in nature.  We are still at a low absolute level, so I don't believe these indicators are shouting anything at us, but we should take heed of the short-term positive action.  You can see on the VIX.MR chart that the last few times we spiked to the 10% level, we typically saw a nice rally in the S&P.


BEARISH

COT - We have finally seen these numbers become less bearish for the first time in a while.  The commercials decreased their net shorts while small specs have decreased their net longs (you can see that more clearly on the stochastic charts).  While neither group made a significant change, they are now going in the right direction if you're looking for a market rally.  The quick decline last week may have prompted more short-covering by the commercials (who buy into declines), so once again I will be anxiously awaiting next Friday's numbers.


NEUTRAL

BREADTH OSCILLATORS - These oscillators are on the edge of being bearish, but are giving somewhat mixed signals.  Although we have had a large number of new highs even though the market has gone nowhere, we have seen the advance/decline ratio hang tough while the broad-based index averages have gone down.  That's a confusing picture and I'm not quite sure if we should construe it as bullish or bearish, so I'll just let it be instead of trying to fit it into a mold.

NEWS ITEMS - We still have a neutral news environment, as stocks and the market in general are acting as they logically should when news is released.  There were no real surprises to the way stocks reacted to earnings reports, warnings or investigations (a commonplace worry nowadays), or to the way bonds or the stock markets reacted to economic numbers or international events.  Not telling us much here either.

STEM.MR - We got a decent BUY indication in this model on Thursday, which hopefully had you tighten stops on existing short positions or had you on the lookout for possible reversal opportunities on the long side.  We are currently neutral with a reading right in mid-range.

STEM - STILL not much movement here, as we're languishing in the 50-60 area in this model.  We have had a few extreme readings over the past week, but not enough to get the moving averages (which is what I use for the signals) to move much to the upside.  It would take a solid day or two of consistently high readings for us to get a BUY signal here.


You can see from the paucity of bearish indicators that the risk to the market on the downside should be rather limited provided we have a stable international situation over the coming weeks (and, it should go without saying, domestic disturbances as well).  Sentiment-wise, we are in the best position for a market rally since January.