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Is the Market Rolling Over to Bear Status?


What the recent signs of complacency among investors tell us about where the market is headed.

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

On life's vast ocean diversely we sail.
Reasons the card, but passion the gale.

-- Alexander Pope

The support levels on the charts pointed to the possibility of a bounce (see yesterday's Buzz post, note that a subscription is required) and the markets obliged us with one.

Click to enlarge

My main concern is the visible difference in intensity and passion of the reactive buyers. Friday's sellers seemed to be more driven and intense than the buyers yesterday and today.

Any deterioration in the market coupled with an inability of the markets to reach recent highs would be worrisome technical development!

On that note, here's an excerpt from the latest BMT Weekly Update:

Over the course of the last week, the markets witnessed several signs of extreme complacency. Put-Call ratio of 0.32 was registered on April 14, which is the lowest since August 2000. Also, as Professor Roney noted on the Buzz, before Friday's decline, the S&P 500 and Dow had strung together a 40-day streak of consecutive closes above 10-day Simple Moving Average, which is also a historic statistical rarity.

Both these events show the skew of sentiment toward the bullish extreme.

August 2000 doesn't conjure an optimistic image -- it was, after all, the beginning of the 2000-2002 bear market. So, does this mean this market could be imminently rolling over to a bear status?

It's usually prudent to see the whole picture and not simply rely on any one point of comparison. In 2000, we had several negative divergences in place such as:

1. S&P 500 was unable to exceed the highs made in April 2000.

2. The Non-confirmation from NASDAQ, Russell 2000, and Semis, which remained dramatically lower in August 2000 compared to April 2000 peak.

3. Divergence in numerous market-health indicators. Currently, we haven't seen any such important divergences. (I will continue to monitor such divergences).

As the chart shows, short-term support exists around the 20-day MA (currently 1186) and between 1140 and 1150 (breakout point from lateral consolidation and vicinity of 50-day moving average).

In absence of any major divergence, this market seems to be setting up for a normal correction and I would use any deterioration following a weak bounce as an excuse to trim my positions.

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No positions in stocks mentioned.

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