Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

Is Bullish Sentiment Now Low Enough?

|Includes: IWM, QQQ, SPDR S&P 500 Trust ETF (SPY)

The inability of the S&P 500 to surpass the late January highs and the tight trading ranges has caused an increase in bearishness among investors and traders. The White House induced volatility has also not helped.

The change in outlook has been confirmed by the sentiment data from the American Association of Individual Investors as 46.2% were bullish the week of January 5th. Three weeks later on January 26th the bullish % had fallen to 31.6% and it was at 32.8% last week. This is a decline of 29% in the bullish % from the Trump rally highs.

The increased skepticism is also reflected by the increase in bearish commentary in the financial blogs and on the TV financial stations. The fundamentalist analyst has any number of measures to use that convinces them that stocks are too expensive. A little research however will reveal that many of these analysts have been saying the same thing for many years. They will eventually be right.

Some are warning that the market is looking as vulnerable now as it did during the summer of 2015 and in early 2106. The analysis of the number of stocks advancing versus those that are declining tells a different story. In a strong market more stocks are advancing then declining so the cumulative advance/decline line is rising.

As a market is topping, as it was in the summer of 2015, the advance/decline line will be making lower highs even though prices are still making higher highs. In early July of 2015 the divergence was becoming more pronounced but stocks did not start to plunge until August.

The weekly chart of the Spyder Trust (NYSEARCA:SPY) shows that as it was making a new high the week of July 24, 2015 the S&P 500 A/D line was much lower (line 1). It was also below its declining WMA and five weeks later the stocks plunge culminated on August 24th.

  • As the Spyder Trust rebounded in the fall of 2015 the weekly A/D line made lower highs (line b) as it was weaker than prices. By the end of the year the A/D line had made even lower highs,
  • At the market low in February 2016 both the weekly and daily A/D lines formed higher lows. These bullish divergences along with low bullish sentiment and other bullish technical signs suggested a bottom was being formed. (Is There Blood In The Streets Yet?)
  • Since then the weekly A/D line has stayed above its WMA except for five weeks ahead of the election. It moved back above its WMA the week of November 11th.
  • The A/D line has continued to make new highs, line c, which is consistent with a strong market.

The daily A/D lines turn positive or negative ahead of the weekly analysis and in December the Nasdaq 100 A/D line broke its downtrend, line b.

  • Then on December 27th the A/D line made a new all time high (point 1) which signaled that is was going to be a market leader. It was the favorite pick for Viper ETF clients and is up 6.2% YTD.
  • The sharp drop in the A/D line at the end of the year held well above the prior low, forming the basis for the current uptrend, line c.
  • The Nasdaq 100 A/D line has continued to make higher highs in January and early February. It shows no signs yet of topping out.

Summary: The Spyder Trust completed its flag formation on January 25th which was supported by a new high in the S&P 500 A/D line. The small cap Russell (NYSEARCA:IWM) is still in its trading range and it needs a close above $138.25 to signal that its uptrend has resumed.

This A/D line analysis is typical of the content of the trading lessons that are sent out to subscribers of the Viper ETF Report and the Viper Hot Stocks Report. Each service is just $34.95 per month and new subscribers get the five most recent trading lessons.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.