During the past few weeks, the bulls and bears have been in a battle royale at the precipice of the February 2010 support level. The S&P 500 index has finally broken above the range with a positive close at today’s high. It also regained the 200 day moving average.
The two camps are mostly divided along ideological lines. If you’re bearish on the stock market, I’d wager that you give more weight to fundamental considerations like:
- the Greek (and European) sovereign debt crisis
- the decline in the ECRI’s Weekly Leading Indicators
- weak retail sales and a maxed out consumer
- the possibility of a “Double Dip” recession
- the high unemployment rate
- the rising financial stress indexes (TED spread)
- the high amount of debt in the world
And if you’re bullish, you probably give more weight to technical analysis, like:
- positive cumulative advance decline breadth divergence
- moves relative to the 200 day moving average
- all time record extreme TRIN
- Lowry Research’s proprietary indexes (Buying Power and Selling Pressure)
- Buying and Selling Climaxes
- capitulation visible in various stock market sentiment gauges
- the Confusion Index (based on market internals)
Meet the Bears
Nouriel Roubini (RGE), Bob Janjuah (RBS), Dylan Grice and Albert Edwards (Societe Generale), David Rosenberg (Gluskin Sheff), etc. The names are familiar to you already and so are their opinions. These are the bears and for the most part, they build their convictions on fundamental analysis.
The two camps are divided and pitted against each other with a few exceptions. Richard Russell who is widely recognized as the most exceptional student of Dow Theory is now bearish citing technical breakdowns and the fear of deflation. Robert Prechter, the recognized authority in Elliott Wave analysis is also bearish, expecting the continuation of the secular bear market to take prices back to March 2009 levels. And finally, Mark Steele (BMO Quant/Technical Research) who told clients to “Go to Cash - In Plain English“.
Among the reasons for issuing a “Get out!” message, Russell pointed to the break down in leadership stocks like Google (GOOG). But if I may be so bold as to quibble with the oracle of the Dow a bit, I would like to point out that the while Google has been showing weak relative strength for some time, other leadership stocks - including Apple (AAPL) which he specifically pointed out - are doing just fine. In fact, the advance decline breadth (see above link) demonstrates that the majority of stocks are in fact much stronger than the superficial numbers on the indexes.
I do not have a monopoly on truth nor do I pretend to know what will happen. I’m simply pointing out that for the most part, the bulls and the bears are split along how they approach the market. And I don’t disagree that if you look at the fundamentals, things look absolutely horrendous right now.
But isn’t that reflected in the sentiment and posture of investors and traders? We’ve already looked at sentiment during this decline so I won’t go over that again. You can find the weekly overviews here: Week of May 28th, June 4th and July 11th.
As well, while Market Semiotics continues to be bearish long term (who isn’t?) but in the short term a bounce would not be a surprise since their proprietary sentiment indicator (Semiotics Sentiment) has collapsed to just 1% after bumping its head on the ceiling at 100% in late April.
Smart vs. Small Option Traders
In contrast to the “smart” option players who trade in S&P 100 index options and are leaning into this decline, the smallest option traders are buying protective puts at a very high rate. Referring to the ROBO option sentiment indicator, Jason Goepfert of SentimenTrader.com wrote recently:
Last week, small traders spent 24% of all of their option volume buying protective puts - at the worst of the worst times during the prior bear markets, that amount only reached 28%, so we’re not too far off from that.
After only a ~14% decline, small option traders are spooked enough to load up on puts to almost the same degree that they did during the darkest days of a harrowing bear market. If that doesn’t tell you all you need to know, consider that last week the S&P 500 index closed up by about 2.5%. So this shift in retail option sentiment becomes even more contrarian. That tells me that we have washed out a lot of weak hands, making the case for higher stock prices in the short to intermediate term.
Lowry Research Update
Pimm Fox sat down with Richard Dickson again last Thursday and for the most part, the Senior Market Strategist at Lowry Research reiterated his view that this is a correction, not a new bull market.
Dickson also mentioned that we would need to see confirmation of the 90%-90% upside day on June 10th. We got that the following day, last Friday and we also got it again with today’s close. This took us above the range and the long term moving average. Another important point that Dickson touches on is the light volume accompanying the rally from the lows. In his views this is not necessarily a negative as it means that supply has been exhausted.
To listen to the interview, press play and let it buffer, then jump ahead to the 25 minute mark to listen to the complete interview:
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