Trader’s Narrative

This week the markets were propelled ahead by the positive earnings of major tech companies like Intel (INTC) and Google (GOOG). Here is the sentiment summary:

Sentiment Surveys
Investor’s Intelligence results are basically unchanged so no need to delve into them. The AAII survey this week shows a reemergence of bearishness with 49% of respondents in that camp (only 30% are bullish). This is rather odd because the market has continued to go higher but part of the mysterious gloominess of the retail investor may be that the survey was completed on Thursday, before Friday’s powerful rally.

In any case, as a contrarian and a current long, I always welcome pessimism, especially when it is accompanied by higher prices.

Market Breadth
With the rise in market prices, the percentage of stocks above moving averages has also increased. The shortest time frame I use is the 10 day moving average and it now shows about 82%, very close to levels which have pushed back rallies in the past. This is where we found this indicator last October when most indexes created their swing highs.

Chart from indexindicators.com

But is is a very short term metric which doesn’t preclude the market from rising higher in longer time frames. More importantly, the percentage of S&P 500 stocks above their 50 day and 200 day moving averages are 71% and 40%, respectively. The most important is the longer metric which is still very low.

It reached eye popping lows of 15% in January and again in March 2008. We haven’t seen numbers that low since the darkest days of the last bear market. This was one of the reasons I was unapologetically bullish. As I’ve brought to your attention repeatedly, such extremely low breadth numbers have always marked the start of a new bull run.

But right now, we’re a tiny bit over extended and I wouldn’t be surprised to see the market yet again pause and/or be rebuffed at the 1400 level which has turned it back 3 previous times. The difference now is that there are more and more stocks participating in the rally, as can be seen by the number of stocks above their 200 day averages.

CBOE Put Call Ratio
After spiking higher than 1.30 the CBOE equity only put call ratio backed off this week in a hurry, falling below 0.59 - this is the lowest number since early February 2008. And yet another short term argument for the tape to run into resistance.