When sentiment gets up to these levels you have to take notice and ask yourself about how much more upside there is before things come down hard.
Historically it takes 40%, or slightly above, before a bear market starts for the short-term in order to unwind. In 2007 we saw it reach 42.5% before the crash in the stock market, and the same crash happened in 2011, with a 41.6% reading. We’re at 33.6% with bears still above 20%, although real close at 21.1%. In other words, we’re not at deaths door for the market, but the caution flag should go up telling you it’s fine to be involved a little bit with the uptrend. But don’t get overly involved because we run the risk of a big swoon down to unwind at any time. Unwind sentiment that is as the markets themselves are no longer overbought, although they have been over and over again for quite some time, which, of course, is what has caused the bull-bear readings to get this elevated.
So we observe the fact that the bulls are getting frothy here, but that is by no means a sell signal at 33.6%, and thus, shorting is still dangerous for the time being. Don’t get sentimental over the sentiment. Keep in mind the overall trend is still higher, and even though we’re getting up there in sentiment, you should not look at this market from a bearish perspective. In addition, when the bull-bear spread does get higher, if it gets higher, I should say, topping is still a process. The bulls have learned to buy weakness these past several months, and, thus, there will be a lot of whipsaw up and down, even when we actually do top out. I’m not talking about a pullback type of topping out. I am talking about a sever-correction type of topping out. Observe and react. Understand the need for caution. Also understand the need to still be a bull, bigger picture.
It’s very interesting to note how the daily index charts are no longer overbought. The whipsaw back and forth over the past several days has done a solid job of unwinding things. That’s what happens in bullish environments. The market finds a way to unwind without killing price. So far so good, thus, the door is open to somewhat higher prices, if the bulls can gain enough momentum. Some RSI’s are down into the upper 50′s, which is a whole lot better than staring at 70+ all the time. It does get on your nerves, because you know it has to unwind at some point. If the market holds well over the next several weeks, including even if we get a small move lower first, the bull-bear spread will reach the first big red flag at 35%. But it would take a move probably near 1600-1650 on the S&P 500 to get that level to the critically dangerous level of 40%. So, for now, the indexes are no longer overbought. That’s at least a good thing for the very short-term, but with readings this high on the bull-bear spread, a natural small-to-medium pullback can occur at any time.
The S&P 500 has resistance at 1525. After that roughly 1550. The old high was at 1576. I don’t think we”ll get there, but you never know. You stay with the trend in place until we see technical evidence that the uptrend is truly over for a while at the least. 1500 down to 1490, and then 1470 is great support. Those levels should keep the bears from getting overly aggressive for a while longer, but a natural test back to 1490 can always occur. As I’ve said repeatedly, there’s more risk in the market here, but we’re not at extremes on anything, so nothing earth shattering to the down side should take place quite yet.
Stick with the trend, but be appropriate.