A few weeks ago I wrote an article (link here) in which I reviewed several measures of sentiment. Even then, I was confused why media pundits were calling this "the most hated a rally ever," when most of the sentiment indicators were showing that investors were fairly optimistic.

Here's an update of those indicators:

The Put/Call Ratio ($CPC):

The put call ratio measures the rate at which option traders are buying puts (bearish bets) compared to calls (bullish bets). This indicator is the most useful once it reaches extremes; when the market is topping investors

Put Call Ratio:

The put/call ratio measures the ratio at which options players are buying puts (bearish bets) compared to calls (bullish bets). In my experience, once options speculators have bought enough puts or calls to move the three day moving average past the one standard deviation mark, the reading should be considered extreme. This usually results in a reversal.

(click to enlarge)

Source: Chart created at stockcharts.com

Notes: We can see that exact behavior at the June 4 lows. Once speculators bought enough puts to cause a lopsided extreme

The head and shoulders pattern mentioned Wednesday failed to complete (did not break neckline), the markets rallied and volatility spiked with news of possible coordinated action by central banks. Elections are being held this weekend (Sunday) which could have big ramifications for the market Monday morning.

In situations like this, where a large percentage of the indicators I follow are not lined up, meaning there's a lack of clarity, and there's a big news event they could move markets either direction looming, I think it's best at this point to simply sit on the sidelines and see what plays out.

So while there's currently no high probability trade to make, as far as I can see, I might as well use the time to discuss some of the other things I'm seeing in the market, namely the long-term non confirmations that I've been mentioning in previous articles and

Here's an update of long term indicators as well as the position of my long term trend model, which I use to make longer term decisions (over 1 year) on the market. I tend to favor shorter term trades when they are aligned with the most likely direction of the long term trend.

Shiller PE:

The Price/Earnings ratio is a method of evaluating the relative price of stocks. By dividing the price by the earnings we get a ratio that can be either compared to the ratio of other stocks, or in the case of the market as a whole, to it's relative position compared to historical levels.

The Shiller price earnings ratio was developed by Yale economist Robert Shiller and attempts to smooth the volatile raw price earnings ratio. Generally, above 20 is considered a market that is expensive and reduces the likelihood of gains going

Sentiment Surveys:
I track the results of several weekly sentiment surveys including Investors Intelligence (or II: which polls news letter writers), The American Association of Individual Investors (or AAII: which polls individual investors), and the National Association of Active Investment Managers( or NAAIM, which polls money managers). The combined results cover three groups

In previous articles I've been laying out the case that long term valuations for the stock market are historically high, which generally means a leveraged financial system. A leverage financial system generally means an economy that is fragile, susceptible to shocks, and prone to recessions. As equity markets closed lower in August and have entered September, historically the worst month for the stock market, the question being pondered by investors: is this the normal summer doldrums or are we headed towards another recession?

The Economy

ISM Cycle

In my previous article I wrote that I was expecting the economic data to start coming in weaker than expected because the ISM cycle looks like: 1) it is peaking 2) it is now in a cyclical decline. The ISM data has continued to come in weak so let’s see where we’re at in the cycle.

Inventory stuffing: the first thing that

Something I keep an eye on daily is the McClellan Oscillator. It is part momentum indicator, part breadth indicator, measuring the moving average convergence/divergence of the net advances on the NYSE. In mid-June this indicator

Chart 1: Investor's Intelligence - Percent Bulls
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Gauging sentiment is not an exact science, but I think this chart is pretty clear, of the advisers and newsletter writers polled, that the majority of them are bullish, recently hitting a high of almost 60%. This is the highest reading, going all the way back to the 2007 all time highs. Put into context, this reading is even more extreme than during 2007 because back then, the economy was humming

It’s the Economy Stupid: Part Deux
A data series I have been following regularly, the Consumer Metrics Institute’s Daily Growth Index (DGI), has continually shown deteriorating underlying conditions. Mainstream economic analysts are currently not worried, but I am. I think they are mistaking an inventory restocking cycle and a rebound in record pessimism recorded in early 2009 for a cyclical recovery. But the DGI shows a clear

The woefully backwards looking measures of the economy are missing the alarming rate of decline in the demand side of the economy. Patterns and indicators are aligned and in agreement; the current rise is exhausted or nearly so and that a new leg down will be starting immediately. Ironically, though we are at the precipice of a major decline, studies of sentiment and attitudes toward risk show complacency. The next leg down has the potential to be vicious.

It’s the Economy, Stupid:

The demand side of the economy has been contracting at a worrisome and increasing rate. For a few months now I have been posting charts (courtesy of the Consumer Metrics Institute) showing a drastic slowing in broad consumer activity. This is a much better predictor of future economic activity because the BEA’s read on the economy is just not predictive (especially at turns).

In fact I would

In my last article I incorrectly called for the resumption of the bear market that ravaged stocks from late 2007 to early 2009. Despite a bevy of technical evidence I believed to be in my favor, the market apparently had other ideas, or as a friend and fellow trader put it, “even if you’re good, no one can tame the market.” Sentiment gauges such as the Investor’s Intelligence percentage of bears, and the 5 day moving average of the CBOE total put/call ratio reached levels not seen in years ( %bears had not been that low since 1987 in fact). Combine that with very overbought momentum indicators in equities, a steadily rising dollar, falling commodities and a sell off with extreme down side breadth that caused the Dow to breach its March-July low trend lines, and there was a very convincing setup for the start of another leg down.

After the 700 point slide in the Dow, many were wondering if this was just a correction, or the start of something else, I lean towards the latter. One of the things I was looking for to confirm this view was a pick up in terms of negative breadth and volume. Much like the deteriorating internals was a clue to the inevitable end of the uptrend, the down trend was confirmed today (February 4th) with an increase in internal selling strength. During the relatively weak bounce

Sept. 18 -- Germany and Austria led governments and companies in Europe selling $21.7 billion of bonds in the U.S. currency this week to take advantage of the reduced cost of exchanging the proceeds back into Euros.

Other countries including Belgium and Spain have also begun selling Dollar bonds. Dollar bears will see the headline and see confirming evidence, however timing is everything and to me the timing here is very interesting. Sentiment surveys show that nearly everyone is currently bearish on the dollar, in fact people are about as bearish today on the dollar, as people were on

First let's take a look at the TLT, a proxy for the long bond.

From this chart we can make several observations. First, we can see treasuries (bars) rallying as investors flocked to safety in anticipation of carnage in the stock market (SPY yellow line). We can also see that the bond market then begin to decline approximately 2.5 months before the stock market began to rally, and did not make a new high in early March. This non-confirmation of the March low in stocks was in fact foreshadowing the current rally in equities. Now the TLT may be signaling something else; after making

Bear markets end on bad news, the same way bull markets end on good news. In early March the mainstream media was reporting that the best investment strategy was to sell stocks, and go long guns ‘n ammo, perhaps diversify into some canned food. The exact opposite turned out to be true; that was one of the best buying opportunities in history.

So what do the charts say:

What stands out is

A prime example is BRCD, or Brocade Communications Systems Inc.

From a technical perspective, this stock is an interesting short. As we can see from this chart, BRCD has been range bound since it crashed back to earth after the tech bubble burst. Currently it is near the high end of it range and should be bumping into almost a decade’s worth of very strong resistance. Literally for over a decade, anyone who has bought above these levels is at a loss. Furthermore, it just stands to common sense;

I just wanted to follow up on my article on selling exhaustion with a chart that better illustrates what I am seeing. As I mentioned in my previous piece, selling exhaustion is visible when you have two troughs, and during both troughs, volume peaks. However, during the second trough, the volume is noticeable lower than the first trough, indicating that sellers do not

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You can see here that every rally has been met with declining volume, while sell offs have been matched with large increases in volume. This rally, while the most impressive and long lasting in terms of duration and percent change, has been no different and has seen consistently falling volume. However, another observation is that volume peaked during last October’s vicious week long collapse. Furthermore, post selling trends have also seen volume