Caution: Market Sentiment Goes from Fear
By Joe Duarte on July 23, 2017
to Exuberance in a Week’s time
I’ve been bullish on this market for a long time.
And every time I’ve tried to short it, I’ve been burned. But as of July
21, I am increasingly concerned. And just to be clear, it’s not just one
thing that’s suddenly a bit different. Indeed, there are several factors
that are making me nervous, as I detail below. Suddenly on Tuesday, there
was a sudden change in the market’s sentiment from caution to exuberance-irrational
or otherwise. But the fact is that nothing really changed. Washington is
still a mess. The economy is just plodding along. And tax cuts are nowhere
to be seen. Yet that’s not all. This sudden turn in sentiment is happening
at the same time that the market’s technical indicators are also concerning
Greed-Fear Gauges Flash Caution
Last week I noted the rising score of the CNN Fear-Greed Index (GNF),
as the index closed the week with a reading of 64 on July 14. I hate to
say it, but it got worse as the July 21 closing reading was 73. That’s
a 24 point jump in greed over two weeks. It can get worse, as last year
around this time the index was reading 90. Still it’s not good to have
this much greed in the market after the major stock indexes have recently
made new highs and there is a general feeling in the air that the market
Moreover, the CBOE Put/Call ratio is also starting to show a significant
fall in caution, as the total Put/Call ratio closed at 0.74, down from
last week’s moderately bullish Friday close of 0.84 and the very bullish
0.93 just two weeks ago. Generally, total option P/C ratios above 0.9 are
A more detailed look inside the P/C ratios shows that institutions are
now over the top bullish, as the index P/C ratio closed the week at 0.67,
while equity traders were well into scary bullishness with a P/C of 0.56.
Market Looks Short of Breadth
The NYSE Advance Decline line (NYAD) is not giving a sell signal but
it is looking as if it needs a rest after a near non-stop climb to new
highs during the first three weeks of July. On the bullish side, NYAD remains
inside its upper Bollinger Band (green line above NYAD), a sign that even
though the line has risen and is likely to pull back in the short term,
the advance has not gone so far where the odds of a longer lasting pullback
are very high.
That said, this is earnings season, which means that day to day changes
based on any given company or sector’s results could change the overall positive
longer term tone of the market. Furthermore, the RSI has given an overbought
reading on NYAD. The most recent RSI overbought reading for NYAD lead to
a short term pullback in the market.
S & P 500 Needs a Rest
There are no coincidences in life, which means that given the generally
tired look of the market’s breadth (NYSE Advance Decline Line) it’s
not surprising to see the S & P 500 also looking a bit peaked.
For investors, the most important fact at the moment is whether this
generally tired look of the big cap stocks, along with the similar
picture in the market’s breadth, is meaningful in the longer term.
And the only way to know that is to give things time to develop.
There is an interesting divergence on the SPX chart, as the On
Balance Volume (OBV) indicator took a nose dive on Friday, while
the Accumulation Distribution line (ADI) moved higher. When taken
together this data suggests that there are still buyers of stock,
but that the sellers are starting to outnumber the buyers. Another
way to look at it is that passive money is coming in but active money
is starting to move out. This is not something positive, if it continues.
Are Transports Flashing A Market Sell Signal?
Dow Theory, one of the early technical analysis methods for modern
stock markets, states that bull markets are more reliable when the
Dow Jones Industrial Average (INDU) and the Dow Jones Transports
(TRAN) confirm one another’s trend. Unfortunately, this is no longer
the case. As the two charts below show, the transports are suddenly
in a funk while the industrials are just off of a new high. This
is not a healthy situation, as traditional Dow Theory interpretation
of this situation means that manufactured goods are not being transported,
which translates to falling demand and over production.
Meanwhile, on a purely technical basis, the On Balance Volume and
Accumulation Distribution indicators for the industrials are suggesting
the same thing as those for the S & P 500 – passive money moving
in while active money seems to be moving out. Even more disturbing,
the ROC for INDU has made lower peaks over the last few months with
each subsequent rally. This suggests a loss of momentum.
This May Just be a Blip – But Why Trust Robots?
As I’ve said many times, this is a weird market powered by easy
money and robot trading algorithms. That means that anything can
happen, such as the robots may once again buy on any dip and we may
be off to the races and more new highs. The problem with being careless,
though, is that once you get comfortable with a set of circumstances,
fate has a way of showing you how wrong you were. I don’t want to
be wrong and lose my shirt. So until proven otherwise this market
looks tired. As a result, I suggest caution – take some profits,
raise a little cash, consider buying some protection. If I’m wrong,
I’ll be buying stock like crazy again after a bit of a rest. I can
play in the fantasy market as well as anybody.
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