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Sunday, July 14, 2002

This week I will not be able to complete a detailed weekly commentary.  I would, however, like to point out a few highlights.

I mentioned last week that we were overbought within a downtrend.  That has now been alleviated and we are once again somewhat oversold, but somewhat oversold while under every conceivable trendline does not get me excited.  If we were EXTREMELY oversold, that would be one thing, but our condition now is nothing special in the short-term.

Some of our breadth measures are quite oversold, such as the NH/NL ratio and NYSE cumulative TICKS.  The 10-day A/D line is also oversold, and we will be dropping an extremely large positive number on Monday.  If we have negative breadth on Monday, this indicator will become significantly oversold (more than two standard deviations from the 4-year average), which I consider a positive development for the short-term.

The sentiment surveys as a whole remained about the same, thus a change in the AIM model of only 0.4%.  We continue to see extreme pessimism here.  On that note, the German Neuer Market survey showed a stunning drop in bullishness, especially considering the market action during the survey period.  That market (which exhibits a very tight correlation to the U.S. Nasdaq 100), did not make a new low on the week, but the failed rally during the survey caused a huge drop in bullishness, particularly among the small, private investors that are polled.  Apparently, they were looking for a large rally from the oversold conditions last week, and when they failed to have follow-through from July 5, most of them gave up the ghost.  The institutions continue to wade in on the long side, as they remain consistently more bullish than the small traders.  There really is not enough data on this survey to draw significant conclusions, but I consider it a positive development.

There was good volatility during the COT reporting period, and that served to mute the movements in that report.  The commercials added to their net short position by a small amount (about 3,600 contracts) while the small specs added to their net long position by about 3,500 contracts.  Neither is positive, but it wasn't enough of a movement to make me net bearish either.

The NYSE members report also didn't include any Earth-shattering developments, although there was a marked increase in shorting activity.  Total activity showed the greatest jump since the reporting period when the S&P broke the 1050 level - the problem is that no group in particular accounted for a bulk of the activity.  The public continues to short in an historically aggressive manner, but it wasn't particularly more so than the recent past.

In short, there were no reports this weekend that were notably different from those of the past few weeks.  The short-, intermediate- and long-term sentiment environment is now moderately positive.  I'm not seeing anything that suggests an imminent crash, nor do I see anything that suggests an imminent 20% rally.  Sentiment will not ALWAYS clue you in to both, but typically you will see a heads-up before one or the other occurs.  With that in mind, my working theory going forward will be that of increased volatility that bounces around in a trading range with an upward bias.

 - Jason Goepfert