Equity Market: Things Look Ugly for the Bulls

I spent the weekend looking over some of my sentiment model indicators and things look ugly for the bulls. First of all, the latest AAII survey of individual investors shows a spurt in bullishness, which is contrarian bearish.

click to enlarge


Moreover, the latest Commitment of Traders report shows that large speculators (read: hedge funds) are now in a crowded long in the high-beta NASDAQ 100 and the net long position has started to decline, which is another bad sign for the bulls.


Shanghai Index breaks down
China has become the last hope of growth in a growth starved world but the Chinese stock market is rolling over. The chart below shows the Shanghai Stock Exchange Composite Index, which has fallen through an uptrend line that began in November 2008, as well as the 50-day moving average. Both of these are important signposts for technicians that point to an interruption of the rally.


Given some of my recent warnings about the equity market (see here and here), these additional data points are more indications of the precarious state of the US equity market.

Comments

[Moon Kil Woong:]

Things may not be all rosy for thr bulls but the bears are about 6 feet underwater. It is true we must be cautious, but even with a 10% correction no one can really say the sky fell for the bulls. Hedging may be prudent but shorting these days is just as dangerous as going long.

Aug 17 04:00 AM

[Macro_Man:]

Shanghai charts look horrible. This is the beginning of the end for risk assets and a period of strength for the much maligned U.S. dollar and U.S. Treasuries.

European and US bourses have handled the Chinese action quite well so far. Today, will be another test. But, given the extent of the damage to Shanghai, one could have easily expected a much more massive drop in Europe and U.S. futures as of now, which makes me think that the bullish sentiment is still very strong.

I think the bears have only fired the first shot across the bows. It is going to take a little more time and a few more disappointments before the bears can get going again.

But, certainly not a time to be long without full protection, and yet, still dangerous to be short. This could be a period where bulls and bears wrestle for control with both sides losing money and energy on sideways action. The rally is in its last stages, but the bears need additional catalysts before being able to take control.

Aug 17 04:58 AM

[Roger Knights:]

"but shorting these days is just as dangerous as going long."

A good way to protect yourself, or go short cautiously, is by buying a few "insurance" puts on SPY, as described in this recent SA article:

seekingalpha.com/artic...

Aug 17 05:04 AM