Have you taken a good look at the hourly chart of the Nasdaq E-mini lately? Doesn’t it look like a cardiogram? It has basically spent a full week, since last Monday; testing a polarity line roughly the equivalent of the prior highs set the last week of March. There are several reasons for it but mostly it’s because the different tech sectors are all over the map. On the one hand we have charts like the semiconductors looking to go higher, biotech stocks that are hitting big resistance and others like BBBY and EXPE that are breaking through. The tech index is no longer pure technology.
On the other hand we have the inverse relationship between equities and the bond market. For the most part, that relationship held form last week as the long bond broke down and we had indices like the Dow and Russell 2000 at new highs. In the case of the Russell, this new high is above 2007. What does that mean? Well, we now have yet another chart making an important new high. I have to be honest with you; I still get angry emails from perma bears taking me to task about talk of a bull market. This time I’ve been taken to task again by someone questioning my sanity and assuring me the market will be below the March 2009 bottom at some future point. I do live by what radio guys call the 1 in 100 rule. That means if one person has the nerve to write in and express the opinion, there are at least another hundred people who think it. I’ve been building the case for the bull and why not? It’s been up over 2 years. There have been numerous opportunities for the bears to take it down. The latest and best opportunity happened with last month’s unfortunate tragedy in Japan. But the quake and ensuing Nikkei crash brought sentiment to extreme. You don’t need to look at Investor Intelligence reports to see that the possibility of a nuclear meltdown brought back the kind of emotions we felt in 2008. Ever since that point, markets have been higher.
While we are on the subject of sentiment reports, it was reported last week that bearish sentiment among investment advisors did drop roughly 30% all the way down to about 15% bears. There are lots of people out there who think the stock market is going higher which is now a problem. But there are several factors to consider. Yes, bullish sentiment appears to be at extreme. But just because it’s at extreme does it mean we are going to have a leg that takes the stock market to lows below that of 2009. Here’s what bears fail to understand. Sentiment works differently in bull markets than in bear markets. Think about the top in 2007. At first we recognized a real estate slowdown was materializing. After July 2007 real estate, title and escrow agents realized that deals were closing at a much slower clip if they were closing at all. But sentiment was such that the economic slowdown would end up with a net result of a ‘soft landing.’ Honestly, who ever heard of a soft landing? We were told by people no less than Helicopter Ben that the subprime mess would be contained. Do you remember THAT? It took a whole year, all the way to the summer of 2008 for lawmakers to take the Fed chief to task. I remember the BKX was falling precipitously when big Ben was taken to task by the Senate Banking Committee on the day the BKX bottomed. You’ll remember we had some very interesting Fibonacci calculations firing off that week. It was the same day the SEC announced a freeze and naked shorting of banking stocks. The banks did rally for the next 10 weeks but as we now know, it was Custer’s Last Stand.
But in bull markets, for whatever reason, fear builds very quickly. In fact it took 4 weeks for people to freak out over the nuclear reactor. For those of you who tell me they should be freaking out, I have to remind you that since that point, the Nikkei has been in rebound mode and it’s been that day despite the fact of reports of radiation spreading into the soil and further from the site. The Japanese stock market goes up even as the news doesn’t get better. Do you think it might have something to do with the fact the Nikkei bottomed in the 233 day off the April high of a year ago and the G7 intervention taking place on the weekend of the Gann Master Timing Window?
But while sentiment among advisors is strong, news events remain bad. We struggled through a week where the Federal government threatened to shut down. Who knows, maybe the markets like that. But those are kind of worries that allow a bull to climb a wall of worry and it was just the prior week where we had to deal with housing starts hitting new all-time lows. No matter how bullish investment advisors are getting, headlines reflect lots of worry going forward. No wonder the NQ resembles a cardiogram.