Tuesday, October 18, 2005

Sentiment and Technicals align

I have mentioned how sentiment has been approaching extreme bearish levels recently, but now I am seeing deeply oversold technical conditions aligning with those extreme bearish sentiment readings.

Here are some examples:
  • The Rydex Nova/Ursa ratio has hit a new yearly low at 0.15
  • The Specialist Short ratio recently hit a multi-decade low at 0.13
  • The bulls on Market Vane are at their lowest level (58%) since August 2004
  • The 10-day put/call ratio hit 1.07, its highest reading since May 2004

These levels are often seen just prior to tradeable rallies. In terms of how the technicals are now lining up, consider:
  • The oscillators are now as deeply oversold as they have been at prior bottoms
  • The stochastics are oversold on both the short-term and intermediate-term time frames (the last time was April)
  • The 10-day moving average of downside volume (NYSE) is at its highest level in over a year
I was probably a little early in citing extreme bearish sentiment as a reason the markets should rally. What was needed was a deeply oversold market to wash out the sellers, and let the market lift thereafter. I think that is where we are now.

The combination of this technical condition and extreme sentiment readings leads me to be more bullish now. As such, I think it is too late to sell, and I am starting to add to my positions as well as put on trading ETF longs.

Long SPY, QQQQ, etc.

2 Comments:

At 11:19 PM, Anonymous James said...

I agree 100%. This is probably a good time to start accumulating a few shares.

However, I will not be too surprised if we see more downside movement before the rally.

I am saying ths because I still see individual stocks breaking down to new lows and breaking through significant support. (such as XOM - Exxon - today closing below its 200 EMA)

Cheers.

 
At 7:07 AM, Blogger Kevin Shuller said...

Agreed, its really scary to see the generals that led the last charge (XOM and the rest of the O&G complex) starting to roll over and fail. Besides Health Care, I'm really not seeing much strength and definitely not enough to pull this market up by the bootstraps. Historically, Health Care isn't powerful enough to lead a bull run. It seems like we will need tech or financials to lead the way. Given the current yield curve, its more likely to be tech.

 

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