NFTRH; Sentiment Extremes

We have been looking for a short-term bottom based on support for Dow and NDX, and now broken support for SPX (potential whipsaw?).  We noted the Internets at the bounce level of 280 (DJINET).  We have also noted that the SOX ultimate low for this phase was likely to be a test of decade+ old support, at 540 to 560.  Yesterday’s low was 562.

So I continue talking about the market finding a low and bouncing and if pre-market is any indication, I continue to be incorrect in that expectation.  This morning, let’s view it from another important angle, market sentiment.

Sentimentrader‘s Smart/Dumb data are now close to the extreme sentiment backdrop that preceded the big post-September rally, which we anticipated for similar reasons.  I say “similar” because that event was a flash and a sentiment crash that seemed to come out of nowhere.  This one has been grinding toward extreme over bearish levels.  This instance feels more like a bear market sentiment extreme, which would still need relief but perhaps not ignite as strong or long a recovery rally/bounce.

smart and dumb money

But as noted yesterday, market sentiment is like a Tinder Box right now.  Bears are at risk on the short-term in my opinion. Here is a view of extreme ‘new lows’ data on the NYSE.  While there is risk to the bears now, please note how in 2008 multiple signals cropped up.  That is in line with a ‘crash’ scenario we have (reluctantly) been discussing.  So most often a bounce of some kind (mini or maxi) manifests from this condition.  But so too has one very notable crash (in 2008).  This continues to support the idea that cash is probably right for most people until the situation is clearer.

new lows

In the event that this does not instigate a crash but rather, a short-term low, here is some data showing what has happened after previous ‘new lows’ extremes.  As you can see, historically, the market has made gains over most time frames.

returns after new lows

The caveat is that the market’s historicals have been culled primarily from bull markets.  If this is a bear market, continued lows could be seen.  Here are 3 ‘worst case’ scenarios…

market worst case

My plan will be to release short positions if this begins to look like a short-term bottom.  I’d try to play a bounce, but my default position is going to continue to be cash; not short, not long… cash for the time being.  Also, as a potential investor I want to take a look at the energy sector.  XLE ticked below 50 yesterday.  That was my personal ‘greedy’ target.