Traders are a Bunch of Fair Weather Bears (and Bulls)
They just turned bearish. How little will it take to turn them into bulls again?
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The question, at least for me, is always how fast do the folks who just turned cautious/bearish turn back to bulls? And do they do so just as we return to a short-term overbought condition?
Anecdotally, I can see how it won’t take much to turn folks bullish again. On Monday, my inbox was filled with: 'But don’t you see the head and shoulders top in the SOX?’ to which I responded, ‘Yes, I saw it a month ago, said 5200 would form a right shoulder of a head and shoulders top. Now I am just waiting for my mother to notice it too’.
The funny thing is no one is asking me about the top in the SOX anymore. But we don’t have any data from the sentiment statistics that tell us there is a shift. Heck, they only just turned bearish this week. Yesterday, we looked at the Investors Intelligence bulls falling nine points and today the American Association of Individual Investors (AAII) saw the bulls down 5.5 points (to 39.8%) and the bears up six points to 31%.
We know these guys flip around like day traders, so if the rally doesn’t die before a week from now, they could easily be right back where they were a week ago.
But let’s talk about the Daily Sentiment Index (DSI). About a month ago, I was asked when I thought a good time to look for a pop in the VIX was, and I said I liked to look for that when there are higher lows in the VIX and a low DSI. If that is accompanied by a higher high in the S&P, then I find it is a good set-up to look for the VIX to push higher.
I bring this up because the DSI for the VIX has become a teenager again on Thursday. The final reading was 19. And, as you can see, we are working on a series of higher lows.
My anticipation is that the market will be back to a short-term overbought condition mid to late next week. Yes, I know that happens to coincide with the Fed meeting. If the VIX DSI is under 15 and there is a higher low in the VIX (and maybe even a higher high in the S&P), then I’d say it’s possible the Fed meeting is a ‘sell the news’ event. We’ve got a few days before we get there.
Sticking with the DSI, the S&P is at 71, and the Nasdaq is at 72, so they don’t tell us much now. Should they get over 80, or even to the mid-80s by the time we’re back to overbought, that too would be a sign the rally is close to done.
Finally, I would note that the DSI for Gold is 83 and Silver is 80. The runways for them could be short if either one tops 85 in the coming days.
