Despised Alley Cat Bull Market Marches On
By Joe Duarte on July 9, 2017
This bull market’s resilience is remarkable, and although all good things
must end, the post election rally, like a wily alley cat who climbs a never
ending wall of worry seems to have nine lives. Last week I expressed my
concerns about the technology selloff spreading to other sectors, noting:
“it’s clear that things are changing and that the odds of a rapid and perhaps
meaningful decline are rising if the selling in technology overwhelms the
positive money flow into other sectors of the market. “ I also noted: “Of
course, this may be yet another false alarm and we could be heading to
new highs in the next few weeks.”
And since the markets like to make us all look foolish – as soon as I
turned moderately bearish, the tech stocks seem to have found a bottom,
and the rest of the market may have found enough support to keep things
from falling apart altogether. It’s o.k. with me as I really don’t want
the world to crash and burn. Moreover, I chucked my ego out the window
a long time ago. To be honest, at this point in my life and career I don’t
care to be right in the sense of making big calls and getting quoted in
The Wall Street Journal. All I care about is a visible and tradable trend
to be in place for a good while so I can make money for you and for me.
Sentiment Is Remarkably Leaning toward Moderately Bullish
Confessions of an old trader aside, it’s a good idea to look at the market’s
sentiment during periods of uncertainty. For this purpose I use three measures:
The CNN Greed and Fear Index (GFI), the American Association of Individual
Investors Sentiment Survey (AAII), and the CBOE Put/Call Ratio. And surprisingly,
the market’s sentiment, as measured by these gauges, is tilting toward
the slightly bullish side of the equation.
For example, the CNN GFI checked in at 49 on July 7 th, but dipped into
the low 40s during the week as the market started to increase its level
of worry. This is bullish. The CBOE Put/Call ratio (combined index and
equity numbers) delivered a bullish 0.95, while the index ratio, a sign
of institutional sentiment was also at 0.95. Just for reference, consider
this later number came in at 1.63 the week before the presidential election,
which was a very bullish number and an excellent predictor of the current
bull market. Finally, the AAII numbers show more bears (29.9%) than bulls
(29.6%). This seems like a neutral reading, but in fact it tilts toward
the bullish side since the percentage of bears rose 3 percentage points
from last week’s numbers and the number of bulls fell 0.1 percentage points.
Anything is possible, but it’s hard to see a market selling off much from
here in the short term with these types of sentiment numbers without an
external event of some major impact.
Breadth Remains In Up Trend
As I’ve said many times in the past, the most reliable indicator of the
past several years has been the New York Stock Exchange Advance Decline
line (NYAD) and it too remains in a bullish posture. I’ve been following
this indicator closely since 1987, and there has never been a meaningful
market decline without this indicator giving a sell signal over that period
There are three important factors to consider regarding the NYAD line:
The trend is clearly to the up side as NYAD remains in a rising channel
and has recently found support at its 20 day moving average. This is a
bullish pattern going back to the start of the rally in November 2016.
Meanwhile, the RSI indicator is once again finding support at the zero
line as it has done multiple times since the November 2016 bottom. Finally,
the ROC indicator, which measures momentum, is also finding support at
its zero line confirming the bullish implication of the action in the RSI.
Buy the Dip Crowd Lends S & P 500 Support
It will be interesting to watch the action in the S & P 500, which
saw some selling in the past week. This is illustrated by the downward
drift in the Accumulation Distribution indicator (ADI). And although this
is certainly worth watching, it may be effective countered by the generally
positive direction of the On Balance Volume (OBV) and also the apparent
reversal in the ROC momentum gauge.
Also encouraging is the fact that SPX found support at its 50-day moving
average (blue line) and the lower Bollinger Band (green lower line around
prices). This suggests that buyers may again be willing to buy on the proverbial
Chip Stocks Remain the Key
Much of the recent market’s weakness has been due to the heavy selling
in the semiconductor index. This week I want to examine the chart of the
Semiconductor Index (SOX), which is trying to bottom out.
There are three important aspects of this chart which
suggest this sector of the market is on its way back up, at least in the
short term. The RSI and ROC indicators, along with the Stochastics Oscillator
(see bottom panel of chart), all hit oversold levels last week and have
rebounded along with prices in the SOX index. Furthermore, every other
time we’ve seen this type of technical picture in SOX over the last twelve
months the index has ended its correction and moved on to new highs.
Failure in the SOX Could Be Very Bad News for Bulls
The semiconductor sector has led this post election bull market run
from day one. At the moment its fate is in question, given the recent selloff.
So far, the market has managed to hold up as banking, housing, and construction
stocks have seen positive money flows, keeping the S & P 500 from falling
apart altogether. Thus if the SOX index fails to further its apparent recovery,
it may be the signal that the bears have been waiting for. The key is what
happens to the chip stocks when the SOX index hits the 1060-1075 area, where
the 20 and 50 day moving averages are potentially significant resistance
points. A failure in this chart area for the chip stocks could mean the alley
cat bull market is running out of time.
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