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Stock Market Sentiment At Extremes...Nearly Inverted...

Stock-Markets / Stock Markets 2011 Sep 08, 2011 - 02:36 AM GMT

By: Jack_Steiman

Stock-Markets

I started speaking about this phenomenon last week when the bull-bear spread got down to 4.3%. It was 7.6% the week before, and I must admit, I was surprised to see it drop to that 4.3% level. Then today the sentiment figures got even more bearish on the spread. Only a 1.1% spread between bulls and bears with the bulls at 38.7% and the bears at 37.6%. When levels get this low, and it is unusual that they do, getting sustainable downside action is not easy for the bears any longer. That doesn't mean there won't be down days because, of course, there will be. Some will be nasty. It just suggests that sustainable downside action will become far more difficult as the bear trade is full. When the bears are all in it gets too tough to kill the market. No different than when the bulls go all in. Upside action becomes more difficult. The bull-bear spread can invert negatively but that is rare.


The fact that it's only at 1.1% should put the bears more on the defensive for a while. It doesn't mean the market blasts off. It probably won't. It just means that weakness can now be bought some. If the market can move laterally over the next several weeks to months, the sentiment should start to unwind itself. More bulls will come in, and fewer will remain, or get bearish, when the market doesn't break down. The longer the market holds up, the more likely it is that some will switch from neutral to bullish or from bearish to either neutral or bullish. That's when the opportunity will be there again for the bears. It'll be tough before that happens. Simply said, I'd lose some of my bearishness for the very short-term, but I wouldn't get overly bullish either.

I think the most interesting thing I am finding when I search through stock after stock and sector after sector is the fact that there are daily positive divergences at the most recent lows. They're literally everywhere, including the semiconductor stocks and the financial stocks. The divergences are large as well. Not just tiny, but large, and well below the zero line.

There are gap ups that held today, which confirms the divergences, and that, too, is near-term more bullish. Sometimes those divergences just don't kick in when you're in a bear market. But they sure did today. After some selling to unwind overbought short-term charts, those stocks should move higher in time. The gap ups are key, and they did hold today with relative ease, thus, the bears are in a bit more of a box for only the very short-term. Divergences at the bottom often allow a stock to slowly grind its way higher in a fashion that can often disappoint. You grow impatient but over some weeks the move emerges. Don't lose sight of that should things pull back some. It's quite normal for sure. It's a big positive that the financial and semiconductor stocks joined in the divergence gap ups today. Across the board is better for the bulls short-term then if only a few sectors did the trick.

The President is going to be speaking tomorrow night with his new plans to help stimulate the economy by creating jobs. He will speak of payroll tax breaks and help for the unemployed by extending benefits. He will throw in many other things to help stimulate. The truth is he has tried unsuccessfully as have both sides to do anything to get this economy going. This is probably because the debt situation has left them all in a box with nowhere to turn. It's a sad reality to see years of climbing debt and the excesses caused by Mr. Greenspan in the late 1990's and early 2000's. We're still paying and will likely do so for many years to come unfortunately.

I don't know how the market will react to this speech Thursday night. But you have to play more on what the market internals and technicals are saying than anything else at this point. I think the market has figured it out by now that there's not much anyone on this planet can do to help our current situation. Maybe we'll be pleasantly surprised, but I doubt it. It's no one's fault at this point. Everyone's trying. It's just that the past has caught up with the present. It'll be interesting to listen to, and more interesting to see, how the market responds. I wouldn't expect much.

Massive resistance runs from 1235 S&P 500 up to 1260. Strong, powerful support runs from 1165 down to 1130, and again, down to 1101. The market is in a bigger picture bear flag that will likely extend out for several more weeks to months. There's nothing wrong with that if it unwinds the sentiment issues and gains are contained if you are approaching the market from a bearish perspective. If you're a bull, you'd do anything to take out 1260.That would change things around quite a bit.

But I can promise you that won't be anything near easy to do. The bears would fight harder than you can imagine if we ever got anywhere near that level. The sentiment issues, along with those nice divergences on those daily charts, won't likely allow for any major breakdown, but those bad economic reports won't likely allow for any major breakouts. Range bound in a bear flag that may extend a bit higher is likely on the docket. The premise in now more in the buy weakness camp until the divergences are worked off along with sentiment

Peace,

Jack

Jack Steiman is author of SwingTradeOnline.com ( www.swingtradeonline.com ). Former columnist for TheStreet.com, Jack is renowned for calling major shifts in the market, including the market bottom in mid-2002 and the market top in October 2007.

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