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Don't Be Fooled by the Bear Bandwagon

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The quick jump in the VIX and other sentiment indicators could have people leaning the wrong way.

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Editor's Note: The following was posted in real time on our premium Buzz & Banter (click for a free trial).

The tone of the market has taken a decided shift as "sell the news" has become the order of the day. Whereas a few months ago data points were dissected to look for signs of improvement, the recent approach has been to find faults in the numbers. Nearly across the board -- from good earnings from the likes of Apple (AAPL) to the reconfirmation of Federal Reserve Chairman Ben Bernanke to a big GDP number -- data were met with a critical eye and dismissed as expected and already baked into current prices. As usual, long-term fundamentals don't match particularly well to short-term price moves. Instead, traders have taken a renewed focus on the technical analysis.

Once the S&P 500 cracked the 1120 level it seemed destined with a date at the 100-day moving average, which was at the important 1080-1085 level. With Friday's close below that number, many technicians should have their sell signals triggered. Indeed, not only are broad indices at critical junctures, many individual stocks have seen their charts break multi-month uptrend lines.

But as much as I want to be a bear I'm weary that this could be a repeat of last July. That was when the head-and-shoulders pattern was supposedly forming, I frankly never saw it, and a break of 880 was thought to confirm that a major turn lower was under way. Not only did stocks not head lower, they turned and raced about 9% over the next four weeks.

I'm not saying that we're going to get a repeat of that, but the sudden swing toward bearishness, as born out in the quick jump in VIX and other sentiment indicators, could have people leaning the wrong way. A close above 1080 in the next day or two could mean it had a pullback to meaningful support and will be back in the trading range of 1080 to 1120, which dominated the fourth quarter of 2009.

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No positions in stocks mentioned.

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