It’s amazing how fast sentiment can change. Yesterday morning my twitter feed was full of bulls kicking the bears in the grown but once they came back from lunch those same instigators had put on their bear suits and where calling for mass panic. Amazing.
The move in equities has been described as parabolic and Fed-induced. But I must ask – who cares? We have/had an uptrend and that’s what matters. We can monitor market internals to get an idea of how healthy the move has been and how long in the tooth it may be.
But now that we’ve had what looks like the second down day in a row people are freaking out. So is this just equities taking a breather or have we put in a market top?
First lets look at the move that’s taken place. No one will argue its been unusual for equities to march this high this fast. In fact, going back to 1998, we have only seen equities this extended four previous times. The chart below shows the S&P 500 ($SPX) in relation to it’s upper and lower Bollinger Bands on a weekly basis. Three of the past four instances we have been this far above the upper band has led to a correction, with 2004 being the exception. So yes, it seems it would be healthy for the market to experience some type of down move or consolidation but we can’t be naive in assuming that because we are high in the clouds that the plane must crash.
Looking at the short-term view of momentum, we are already oversold based on certain metrics. I wouldn’t be surprised if traders view this recent bout of weakness as a buy-able dip. That’s what they have done with each of the drops we’ve experienced so far this year and muscle memory is likely to still be fresh.
It’s not my job to make predictions, it’s much easier to let the tape lead the way and allow price action to dictate my reactions. However, if I were to make a prognostication then my guess would be that buyers step in and take us to a fresh high. Not saying it happens today or tomorrow (although it could!) but that bulls take another whack at keeping risky assets in play. This could give us the opportunity to put in some negative divergences and see some of the ‘risk on’ components of the market stumble in relative performance.
Earlier this week I mentioned the extreme in sentiment from Ned Davis Research’s report. We have the building blocks for a correction, it’s just a matter of when the players deem them important. If anything has been apparent in 2013 it’s been that being a equity bear has not been fashionable. I have not put on my bear hat just yet but it may be time to dig it out of the closet.
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