So far the correction is generally going to plan. SPX dropped out of the nose of the Diamond pattern, lost both the 50 and 200 day moving averages and dropped to support. That was all according to plans.
It then dropped further, to a full on test of the October low and is now in its potential A-B-C bounce, which may but does not have to, make it all the way up to 2040.
Adding to the bulls’ case (for a continued bounce in the short-term, and possibly an eventual bull market resumption after the correction ends) is the fact that Rydex investors are now more bearish than they ever get.
The Sentimentrader.com graph shows the extreme net bearish reading with its occasions noted on the chart of the S&P 500 (click for full size view). Note how people did not become anywhere near as bearish at the 2000 and 2007 tops. Indeed, the only signals that generated false bottoms (in 2001 and 2008) were after those bear markets had already taken a big chunk out of investors’ souls.
Now let’s look at the Smart Money/Dumb Money confidence spread. This is simply out of whack with the modest bearish activity that has gone on so far.
Go check Google Trends or take a look at MarketWatch on a daily basis, with writers constantly schooling us about what a crash looks like, doing ‘quant’ on crash historicals and telling us how to protect ourselves from and properly position for bear markets.
Folks, it’s unsustainable.
Then there is Drudge, which has actually been turned into an indicator by Bespoke, and the indicator has made a bullish signal. The theory is that when the market makes Drudge’s top headline, everybody is watching, and that everybody is the public, a traditionally reliable contrary indicator.
Implications
We should maintain an even keel view that this is a correction only, as opposed to jumping on the Armageddon Express along with too many others currently promoting the end of the world to every Tom, Dick and Harry… who are all in extreme attention mode right now.
I feel a lot like I did when in late 2012 my brother in law, a financial adviser, told me the best and brightest fund managers were all in cash, expecting a crash due to the Fiscal Cliff acrimony. My answer was one word: “Bullish”. Then the PALL-Gold ratio crossed up, Semiconductor Equipment began ramping up and now here we are at the next would-be crisis.
Our economic and market indicators (like PALL-Gold) have long since gone bearish, so things are different today. But I am going to ask us all to at least consider the possibility that the signals were in service to this fright fest of a correction (with China the feature), and not something more serious, yet at least.
I am as negative as the next guy on the Federal Reserve’s methods of remote market management by Jawbone and policy. But we should avoid linear thinking like ‘the Fed is going to be forced raise interest rates and the bloated stock market will crash in response’ or ‘all that debt needs to unwind and what goes up must come down’.
I am sure those things will hold true eventually, but time frames in the markets do not conveniently suit the time frames in our logical minds.
Bottom Line
At the least, the above information is a support to the idea that we would see SPX 2040 on a rebound that goes far enough to significantly repair over bearish psyches, before a cruel new leg down and bear market.
At most, it favors a bullish stance beyond the correction if the market drops to support at the October low for a retest amid terribly over bearish sentiment.
What it does in the here and now is to argue that if you are short this market with the thought of cashing in on a crash, you have a lot of company… and it is the wrong kind of company. It’s the public.
As noted would probably be the case, I have bull positions with which to play this bounce. I remain in ‘no commitments’ mode, but am moving closer toward being a bull due to the unsustainability of the pervasive bearishness.
A weakness of mine was my lack of fundamental confidence in the Fed’s man-made bull market and so, despite a bullish stance I under performed legions of relatively carefree casino patrons investors who eventually got on board and benefited from the bull stance that few of us foresaw in early 2013. This time, while still possessing the same fundamental vulnerability, I am going to try to tighten my game up and respect my bias (i.e. closely held views) but call it as I see it.
The update above calls it as I see it on September 3, 2015 and it is time to keep calling it, revising it, and going with it. This method has been working well while the public gets itself worked up with emotion to historical levels here in summer, 2015.
