ON THE MARKET > Bullish Market Sentiment Tumbles

Dr. John L. Faessel

ON THE MARKET

Commentary and Insights

Quotes of the day

“A Nation of Sheep will beget a Government of Wolves”

~ Edward R. Murrow ~

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Bullish Market Sentiment Tumbles

Stock Markets Race Higher

Last week the US stock markets surged; the highlight being the new cycle highs in the Dow Jones Industrials that were achieved on Thursday. The Dow’s technical picture looks encouraging going forward. Volume has increased and is above average in the quick push out of its visitation with its 50-day moving average that occurred on a big gap down day when the S&P downgraded US debt; I think that's another big plus.

When one considers that there were new highs in crude oil, gold, silver, while the Euro’s posted 15-month highs as the US Dollar tumbled to lows not seen since 2008, plus the unrest in of the Mideast it’s no wonder that bullish sentiment is evaporating. Obviously, there are buyers around.

We're told that the global economy will improve by 5.6% this year and I guess that overwhelms the still worsening terrible outlook for housing in the USA. Let's note that lumber futures have just broken to seven-month lows.

Yet, a positive anecdotal story that seems like a ray of hope; a friend tells me he sees dramatic signs of new home building in Castle Rock Colorado and in Clermont Florida. He likes the ETF (XHB) now trading at $18.82. Take a look at that chart; it's very encouraging. The recovery highs of $19.60 were established in the (XHB) in April 2010, if those highs get taken out we’re back at levels not seen since the October of 2008. New home sales are reported today, by the way.

More color from the earnings front: 2010 earnings in the (SPX) are projected to come in between $96 to $98 and $105 to $112 for 2011(all-time high numbers.) Put a 13.75 multiple on them and you come up with the S&P 500 (SPX) at 1444 to 1533. So there's still plenty of upside. Also, profit margins in the S&P 500 (SPX) are at 8.2% close to the 8.6% record and Street estimates are that they will grow at 15% this year.

Short term price support in the in the S&P 500 (SPX) is at 1335 and 1327.5. Last Monday’s (S&P downgrade) low and support is at (SPX) 1249.05. The 50-day moving average support in the S&P 500 (SPX) is at 1315 and 200-day moving average support is 1213.

Price resistance established 2-weeks ago in the in the S&P 500 (SPX) remains at 1399 -1340. The cycle high resistance established on 2/18/2011 just before the Mid-east turmoil & Crude oil supply worries developed remains at (SPX) 1344.

Tracking the Bond Markets $ 91 Trillion –

The BARRON’s Confidence Index ** last week came in at 80.1.Two and a half months ago it posted new cycle highs of 83.7. The recent high numbers are at levels not seen since the fall of 2007. When you consider the news backdrop of the last few months this is pretty amazing.

Last Thursday’s postings of key indicators and metrics:

Cycle highs or lows indicated in RED.

· Thursday’s McClellan Oscillator Neutral @ plus 61

· Thursday’sGold (COMEX) $1503.2

· Crude oil (NYMEX) $112.29

· The Treasury 10-year yield 3.40

· 3-month $ LIBOR at 0.274

· CBOE Put / Call Volume Ratio – 0.93

· Euro – 1.455

· VIX – 14.69

· US Dollar Index – 74.18

· Canadian Dollar – 1.0491

· Copper – 4.398

* Key WEEKLY BULLISH SENTIMENT (i.e. CONTRARY INDICATOR) data points are showing ebbing BULLISHNESS.

Consensus Bullish Investor Sentiment has been on the decline for several weeks. Bearing in mind that the major market indexes are just off - or at - cycle highs this overview suggests that more "bullishness" can be generated before the sell alarm rings.

(High BULLISH readings in the Investor Sentiment Readings usually are signs of Market tops; low ones, market bottoms.)

· The American Association of Individual Investors [AAII] Investor Sentiment Survey of BULLISHNESS fell dramatically to 32.2% from the 42.3% of last week. Three and a half months ago it ticked new cycle highs of 63.3%. The low of the May selloff cycle at was at 30.1% [The lows registered on March 9^th 2009 were an historic low posting of 18.9% only BULLISH.]

· The AAII Investor Survey of BEARISH held again at 31%. It was 28.9% three weeks ago and that was well up from the 25.6% two and a half months ago. 17 -weeks ago it posted cyclic Bearish lows at 16.4% that were lows not seen since 2005. The highest Bearishness occurred 6 months ago when it ticked the summer “market retreat” high at 57.1%. Item of note: In August 1987 it ticked the lowest low ever recorded at 6% BEARISH – Remember what happened on October 19, 1987...

· Consensus Index BULLISH investor sentiment was 64% from the 69% of last week. Three weeks ago it was 71%. The recovery cycle high at 76% was established 7-weeks ago. The multi-year highs in Bullish sentiment of 76% were first reached in the first week of May 2007 just prior to the massive down-leg.

· The Market Vane (Market Letter Survey) ticked down again to 57% from 58% last week. It posted new cycle highs at 68% two and a half months ago. Market Letter writers have backed off the levels of the Bullishness seen in late 2007 when the Market Vane registered above 70%.

· The Citygroup “Panic / Euphoria” Model was up a couple of ticks to 0.29. The cycle high of a plus 0.32 was established in January. It moved from panic into neutral in October 2010. Friday’s posting is 2/3rds up in the high end of the “neutral” zone.

** The Confidence Index is the premier measure of how the bond markets trillions (total global is around $91 trillion and USA is 39% of that) are allocated: (The bond market is twice the size of the stock market.) The ability of this key indicator of market health to post near new highs bodes well for the economic recovery and for stocks to continue forward. One year ago the index was 76.5.

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