This Week in the Markets

This past week the Nasdaq posted a nominal loss, as did the S&P 500.  Google sent shockwaves through the markets on Tuesday as their CFO made some comments about slowing growth, though this momentum bellwether reovered most of those losses by week's end.  Breadth figures were rather mixed to negative, and volume figures were a bit lower, but to be expected following an expiration week.  Commodities saw a nice rise across the board, led by gold, silver, platinum and oil.  Earnings continue to trickle in somewhat favorably, while economic numbers are showing a more subdued quarter.  From a chart perspective, markets are on the verge of a breakout, which could finally be to the upside after many false moves.   Fund flows are usually strongest the first few days of a calendar month, so this may be a catalyst to push the markets higher. 

Fearing Fear Itself

Of the many tools that I use to navigate my way through market action, none are more dependable from a macro view than sentiment gauges.  There are a variety of these available to suit your tastes, but I've found the VIX, put/call ratio and bullish/bearish sentiment to be most reliable.  We talked briefly about the VIX in a recent article.  Let's spend some time today talking about bullish/bearish sentiment and why it is useful to analyze.  First, let's define the terms.  Bullish sentiment is a wave of thinking that markets are heading upward.  Conversely, bearish thinkers believe the market will head southward.  Sentiment can change on a dime, and often does.  There are various services that will 'take the pulse' of the market...we won't name them here, but suffice to say they will generally print weekly or monthly survey data with the shorter timeframes having less lag time.  With the speed of information flow today and the rapid shift of monies from one asset class to another, you can see an advantage to 'reading' sentiment.  You certainly would not want to be caught in a wave against a beginning trend.  To be sure, the public sentiment is a laggard...and this can be problematic if you are trailing the public.  Basically, public traders are the opposite of the FIFO (first in, first out) inventory system....Last in, last out.  As mentioned earlier, sentiment...emotions, can shift quickly...and with great force.   But the public reacts slowly to market shifts.  By the time a bull run is just about over, the public starts to turn bullish...and then the reversal.  Same thing happens with bearish trends.  Further, these trends will reach extreme territory...too bullish, too bearish.  Therefore, one should tend to take a contrarian view, as it is at these extreme levels where trends are on the verge of changing direction.  One way to gauge the extremes is by capturing the readings using a smoothing technique or moving averages.  Another way is to contain the readings within bands, either bollinger bands or trading envelopes.  Whatever the choice, look for the extreme reading in either direction and then confirmation of the trend reversal (spike through a band and then movement within).  What is sentiment telling us currently?  It's quite interesting.  You would think it to be excessively bullish with the recent rally and sharp move from the beginning of the year.  Contrarily, this is not the case.  So, this sets up a very bullish scenario...room to move higher, climbing the wall of worry, bullish sentiment contained.  We'll see if it holds up, and if the markets will rise to new heights.

It's pretty impressive what the stock market has absorbed recently without dropping but instead gaining overall: we've seen the installation of a new Fed chief with no signs of an end to the monetary tightening of interest rates, as well as the uptick in oil prices of the heels of a failed terror plot to blow up an oil facility in Saudi Arabia. We've had the jitters from Google's 55 point plunge in 7 minutes last Tuesday, plus the weak retail sales numbers Thursday morning. So why does the market keep attracting buyers into temporary weakness? While the answer here is less than certain as to why, it's clear that the buying shows a desire to get on board this latest bull trend that started in early-November. What's also encouraging to us is that the Nasdaq has been acting relatively strong versus the other indices in the last week, which is usually a good sign for more upside as fund managers are moving money into the growth-oriented stocks to leverage the upside run. This tends to occur during bull phases when most money is playing "offense" in getting the most out of an up move. Indeed, stocks need a wall of worry to overcome, so all these negative news items only incite us further to believe that stocks can make more upside progress until the bears have capitulated and thrown in the towel.   

Price Headley is the founder and chief analyst of BigTrends.com.