... sentiment that is turning decidedly negative and therefore bullish for the market
Well, I would not go as far to say this. But I will say that the sentiment has been remaining about where it has been at just before the last correction: negative. Very recently, there may have been an improvement in sentiment. Just look at how the market was able to shrug off the Asian market crises and the fear of Japan liquidating their holdings in the Amaerican markets. Also, the market is finally responding to the relatively recent performance of the bond market, or is this just a short term "Santa Claus" rally? The market now has been stalling which IMO is not a good short term sign since this happens just after the market closes two days in a row above 8000. I would think the bulls were waiting for this as an opportunity to jump in once again. 8000 is and has been psychologically significant. SO it appears the bulls are not entirely convinced that the bear phase of the market is over. Negative market sentiment changes slowly.
However, I do not agreee that sentiment that turns decidedly negative is a bullish indicator. I found negative sentiment one of the key indicators that precede market corrections. Now, after a significant correction, and the sentiment becomes very negative, then it can be used as a contrarian indicator. This is where sentiment is taken at its extreme. This also can be helpful in determining market tops, when after a long run up, sentiment becomes very bullish, just like what happened before our first correction this year. That is when I saw press quoting experts that "the economy could not be any better than it is", "market corretion are a thing of the past", "inflation is a thing of the past", and other irrationally exhuberant statements. And then at the beginning of the earnings warnings, the market would quickly recover and bring the stock to new highs, and in some cases *ignore* the earnings warnings of the company. Also, the stock market was closely coupled with the bond market, where every rally in the bond market was met with enthusiasm in the stock market. And so on.
Now, the stock market has had significant periods of disassociation fromt he bond market, including fairly recent bond market activity. Later this year, inflation concerns took a more dominant role, and concerns over Fed tightening where the thought became: "this cannot last forever". There have been enough earnings warning to come out where they have been able to get attention from the more exhuberant bulls out there. And then there was first the flight to more defensive issues or cash, which later was met by the institutions pulling their money out and moving into money markets and even bonds. When I saw this happen, I new something was coming, which turned out to be this last correction. However, I was surprised at how it unfolded with the market moving above 8000 in its attempt to make new highs. Pehaps I was starting to get caught up in some of the new bullish thinking that was expressed in this thread at the time. However, with the markets negative leanings, all it took was news to break that could be interpeted in a negative light for the market to break. "Fear" came into the picture to replace "greed" as the prime underlying motivator of stock market action. Also, I would like to not here that there was a move to small caps. This usually portends the end of a bull run when in the investor's zeal they become speculators in their attempt to find opportunity for further gains. Now the small caps are not performing.
So unless I see further evidence that the market sentiment is changing decidedly positive, and the key players like the institutions respond to this shift in sentiment by moving their money back into the market, I do not see this "Santa Claus" rally sustaining into a significant bull run. Right now I see a mix of positive and negative signs. But I believe that this is becoming a better situation than what we had in the recent past. Still, I do not see any sustainable rally before the latter part of January. I have learned to never underestimate the pervasive impact of investor sentiment which some call the "leanings" of the market, and how slowly this can change. The investor sentiment IMO is still negative. And the high-techs have been doing poorly where there is now a negative divergence between the Dow and the NASDAQ, and the next market run needs its leader(s). But I do see themove above 8000 as being one of the positive signs that I am seeing in this market. There is life yet in those bulls!
It is interesting to note that while the Asian market crises looms near in the background, the recent strength in blus chips appear to be the result of *foreign* investors. So perhaps the market is looking clearly at the Asain market problems and its impact in our markets, at least for the short term. I really do not see the market looking to issues that have a long term impact, particularily in the latter stages of this bull market, even after a market correction. What longer term pespective they manage to stumble upon will quickly go away once the market starts to show strength. Sentiment provides the clearing for thought to occur in. Thoughts are in many cases rationalizations of sentiment, that ballance between "greed" and "fear". IMO this is true particularily in a speculative market.
I do agree with Mohan here that I have been finding the bulls looking for the market correction to continue. Matter of fact, some would feel more comfortable moving back into the market if the market were to correct more.
Just some of my thoughts from my brief glimpses of the curent market conditions. Any comments?
Bob Graham |
