-- Weekly Market Summary --

Caution: Market Sentiment Goes from Fear
to Exuberance in a Week’s time

By Joe Duarte on July 23, 2017

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 is bulletproof.

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 considered bullish.

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.



JoeDuarteInTheMoneyOptions.com is independently operated and solely funded by subscriber fees. This web site and the content provided is meant for educational purposes only and is not a solicitation to buy or sell any securities or investments. All sources of information are believed to be accurate, or as otherwise stated. Dr. Duarte and the publishers, partners, and staff of joeduarteinthemoneyoptions.com have no financial interest in any of the sources used. For independent investment advice consult your financial advisor. The analysis and conclusions reached on JoeDuarteInTheMoneyOptions.com are the sole property of Dr. Joe Duarte.