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The fact that the S&P 500 index has broken above its summer trading range doesn’t impress Robert Prechter. He made a very accurate call in mid April for a top: A Deadly Bearish Picture. This, combined with the fact that he nailed the March 2009 low as an important inflection point, makes Prechter someone worth listening to.
The video below is only a few minutes long and is well worth your time. Right now, he remains bearish and attributes it to several indicators that have reached an extreme.
First among these indicators, is the extreme bullish sentiment from the weekly AAII survey. In the previous link there is a chart of the bull ratio showing that it reached the same (68%) level as October 2007.
Prechter also points out that last week there were just 24.3% of those surveyed bearish but at the October 2007 top, we saw slightly higher bearish readings (between 25.3% and 25.8%). So right now, you could say that there are less pessimists than at the major top 3 years ago.
The second indicator at an extreme is the percentage of cash held by mutual funds. Prechter argues that portfolio managers would not be holding so little cash if they thought that prices would fall and offer them the opportunity to buy at cheaper prices.
Next, he points to the TRIN which measures breadth and has fallen to 0.74 - the third lowest reading in 7 years. The last time we had a lower reading was on September 2008 when we were in the middle of the credit crisis, as the market had a dead-cat bounce off the July 2008 lows.
Finally he makes the ultimate comparison to the 1930’s stock market saying that short term recoveries can fool everyone into buying into stocks and positive sentiment while the market is stair-stepping lower.
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