Monday, July 4, 2016

Is It Time to Light the Fireworks

Last week I mentioned an analog to July 2015 which saw a sharp drop over several days (less that 100 SPX pts) then an equally sharp rally over 5 days that eventually made a slightly higher high.  At the time I did not foresee a repeat without a "do whatever it takes" by the worlds central bankers, but that seemed to be exactly what happened.

Why is that important now?  After the sudden rise in 2015, the market consolidated for six weeks as bearish sentiment plummeted, then late August when the bears were in hibernation the bottom fell out.  The reason I am bring this up is that this year the summer Olympics are being held in Rio, the capital of the Zika virus.  The Olympics will be over August 21st, so don't be surprised if there is a repeat of the Oct 2014 pandemic scare. The key as always is the level of bearish sentiment, so I will be watching very closely to see if there is a repeat of the 2015 sentiment pattern.  See Rio bacteria.

For the overall sentiment charts, I am going to start using a 1 one year period for the intermediate term and six months for the short term.  First looking at the intermediate term Indicator Scoreboard composite, bearish sentiment peaked at an almost identical level as in July 2015 and has started retreating, a move down to the Sell level at -1 SD would be a strong warning for August.

The short term sentiment chart highlights how quickly the bearish sentiment has started to fall.

Conclusion.  The biggest change in any sentiment indicator was in the SKEW, which dropped from a high of 154 on Tue to 128 by Friday (less bearish), so not much indication of a nasty surprise to weak earnings.  Falling bearish sentiment means less likelihood of significant upside fireworks, So looking for several weeks of consolidation with a slightly positive bias.

Weekly trade alert.  I probably should have been more bullish on Mon, but I was looking for a lower retest aka July 2015 bottom, but at least picked up a few pts on early drop.  Likely no trades till August.  Updates @mrkt signals.

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