John, you asked me to comment on the extremely high one-day p/c ratio yesterday: normally, such a high ratio is considered bullish, especially on an up day. however, there seems to have been some distortion due to the very large trade in MSFT puts someone has mentioned already, and put volume on index options was not particularly high. in fact index options trading has lately given me the impression that complacency is still very high. there has been an increase in individual equity put buying in recent sessions that can be ascribed to hedging by a few scared money managers...you know, the 'fully invested bears', of which there are many. many market commentators have pointed out that the various sentiment measures, such as the investors intelligence and consensus inc. polls as well as the relatively high p/c ratios suggest that a bottom is near. this is correct as long as we can safely assume that the market is in fact still in a bull trend. this is however open to debate, as a measly 38% of NYSE stocks are still above their 200-dma's, in other words, the majority of stocks is in fact already in a bear market.
what's more, earlier this year, the percentage of bullish advisors hit a 12-year high, and in my experience, this percentage tends to top out before the market does. so the decrease in the advisors' bullishness does not necessarily indicate that it is now safe to turn bullish - after all, not all of these advisors are complete idiots, and they react to the things that are there for all to see, like the terrible a/d line divergence ,the NH/NL and rising interest rates. for a bull market to end, a change in bullish sentiment is a precondition to some extent...
i would also like to add that the fact that there is cash on the sidelines is also not a watertight guarantee for a rally...after all, this cash may well remain on the sidelines. just look at Japan, which has the highest savings rate in the world. nowhere else has there been so much cash on the sidelines for such a long time - it didn't keep the Nikkei from falling 60% from it's high.
in 1929, the investment trusts had mountains of cash at the time the market reached it's highs...in fact, they had a lot more cash, relatively speaking, than the mutual funds have today.
nevertheless, the market crashed.
there is a lot more cash that is invested already, especially from abroad. European and Japanese institutions have taken up the slack from the decline in U.S. mutual fund inflows this year, and if a falling dollar puts a question mark over this prop for the market, we could easily see a sudden rush for the exit.
i would argue however, that if the dollar manages to reverse and the bond market does not break through it's recent lows, we have the ingredients for a powerful rally. in short, i am not entirely convinced by the arguments for doom and gloom - admittedly we are at an inflection point, and it will likely be resolved in a strong move - but it could be up as well as down.
short term cycles point actually up right now, which means that if the market does not follow these cycles and rise into mid September, we will have proof that the market's character has changed and a big correction will likely occur. if it follows the direction of the short term cycle and the bond and dollar play along, everything's fine.
regards,
hb |
