There's (Ultimately) Good News in the Bad News

The Market

There was a further change in tone in the market Wednesday. I think that’s what happens when the beloved semis get taken to the woodshed. But it was more than that.

I began the day looking at the Investors Intelligence bulls, which barely registered a downtick as they now reside at 56%. They tend to be slow moving (thus why they are an intermediate-term indicator) but I really did expect more of a pullback in the bulls.

A few weeks ago I showed you the Bull/Bear ratio, noting there were more than four bulls for every bear and that was typically a sign of exuberance. It has barely backed off. I fully expect this will come down before the correction is over.

The Transports haven’t made a new high since late last year. Wednesday they broke down. And folks who scoffed when I noted the crummy Transports were all of a sudden highlighting their breakdown as a reason to be cautious. I wasn’t even sure these folks cared about the Transports.

Ultimately this is good news because it means folks are starting to point out the negatives and that’s how we get folks bearish.

Then there is the ISE call/put ratio. The other day I noted that it had come down to 0.98 and that was the first reading under 1.0 since November. Wednesday it was 0.88. These are the types of readings we tend to see when sentiment gets cautious.

To that I would add the put/call ratio zipped right up to 1.28. That’s only the highest reading since March 22 but again, it’s a sign of a sentiment shift.

Anecdotally, someone who is almost always bullish decided to publish a note Wednesday telling us that hey you know, markets do correct. Then someone on television felt compelled to tell us that she had been raising cash and now had nine percent in cash.

I am not picking on these folks (well maybe a little) but mostly it’s to show you the way sentiment shifts as the price goes down. Everyone wants a five or ten percent correction to put money to work but that correction never comes on good news so they get more bearish as we go down.

Now let me brighten your day a smidge. Bonds bounced and no one seemed to care. The DSI for the S&P 500 is at 31 already. I still think we should have an oversold bounce and come down again but there’s a sentiment indicator that has fallen quickly. I do believe the AAII and NAAIM reports Thursday will show a further downshift in sentiment.

Finally, there were fewer stocks making new lows on the Nasdaq and the NYSE  Wednesday. Breadth was flat and on both exchanges the net volume was pretty much flat. The Nasdaq Hi-Lo Indicator is now at 0.28.

New Ideas

I was asked about SPDR Gold Shares  (GLD)  so I figure I should discuss it here. I think it’s too soon to be bearish on it but I don’t like it either. I suspect that somewhere in the next few weeks there is another rally in it but that spike high at $225 I think is going to be problematic on rallies going forward. In other words, I think playing it here you are more likely than not to get whipped around and have very little to show for it. So I’m sidelined for now.

Today’s Indicator

The Volume Indicator is at 49%. It gets oversold in the mid-40s.

Q&A/Reader’s Feedback

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I had been waiting for IBM  (IBM)  to get to $184-185 to bounce. I had an uptrend line and we broke it. But so far it is holding that level I wanted it to hold. So I lean toward a rally in it now. A break of $180 would indicate a gap fill is coming down to around $173.

I had liked Kellogg  (KLG)  back in October and when it got to $18-19 I thought that was enough. Here at $21-22 I remain a profit-taker. 

However, if you want to go into a "food" stock — and yes, I know PepsiCo  (PEP)  is more snacks than cereal — it still is a chart with a base building. I would prefer it mapped out similar to the way I have drawn in blue — and remember it’s the shape of the pattern I’ve drawn, not the exact price.

The question is where can  (TLT)  rally to? My first spot would be that gap fill at $90 but then there is the resistance at $91 so let’s call it $90-91.