NFTRH; Market Sentiment Update

The October decline came after we had been noting various sentiment indicators were over bullish and Participation indexes were negatively diverging.  A hard decline followed and a bounce came as expected with pervasive end of the world bearishness gripping participants.

Now, the bounce has morphed to new highs in some cases and players have repaired their psyches as if October never happened.  For this reason, the markets are vulnerable to the faded, but still viable scenario of a November decline and  re-test of October’s bearishness.

Sentimentrader’s aggregated data show a situation that is close to what it was leading into October.

smart.dumb

The NAAIM have sharply recovered their bullishness.  Before October we had suspected that the smarter of this herd were leaking out of the markets while the slower ones were still in.  This showed up as a divergence (red arrow).  NAAIM is back on trend of that divergence.  Did the ones who panicked to sell too late suck on the V bounce too enthusiastically?

naaim

And then there are the individual investors (AAII), who seem to love the seasonals, the fact that the termination of QE did not hurt the market and the shear power of the wonder bounce.  AAII loves it too much, to the tune of an equal over bullish structure to the one that led the January correction and above the one that led the October correction.  Caution.

aaii

Of course, newletter writers (II) did a quick about face and are firmly over bullish.

ii

The VIX has been totally subjugated.

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Bottom Line

October never happened in the minds of formerly fear stricken bulls.  Further, they perceive nothing to worry about with traditional Nov-May seasonals, Santa Rally season, post-QE, rolling global QE, the US Fed willing to eat the mic and pump QE every moment the market tries to take a routine correction, jobs still strong, manufacturing still strong, input costs for business and consumers dropping…

It’s all good!

That is the problem.  Personally, I am going to watch for accelerated upside (building mania) vs. the potential for a roll over to test October.  If short-term trends (roughly 10 day exponential moving averages) start to be threatened I’ll plan to sell or hedge or go net short for a trade.  But for general purposes I am simply asking you to be aware that the market is back to ‘as good as it gets’ and that means it is vulnerable from a sentiment standpoint.