Tuesday, January 11, 2011
The lower chart is a weekly line chart going back to mid-2008. It depicts the average of the weekly readings for the percentage of bears divided by the sum of the percentages of bulls plus bears. These percentages are reported by the weekly sentiment surveys conducted by Investors Intelligence and by the American Association of Individual Investors. Low numbers indicate fewer bears and bullish market sentiment. High numbers indicate more bears and bearish market sentiment.
As you can see on this chart market sentiment now is more bullish than at any time during this bull market which started in March of 2009. The average percentage of bears (red wiggly line) recently dropped below the low it had reached at the April 2010 top and it also approached the lower end the of the trend channel i have drawn.
Bullish sentiment by itself will not kill a rally. But as you can see on the upper chart, the market's technical condition is also relatively weak. This chart is the 10 day moving average of the number of issues which advance in price on the New York Stock Exchange. Its current reading (second blue arrow) is below the reading of early November 2010 (purple dash arrow) when the S&P was trading around the 1225 level. Currently the S&P is around 1275. The current reading is also below the level reached at the April 2010 top (first blue arrow).
These facts lead me to believe that this market is due for a break, probably of 50 points in the S&P, possibly a little more. Such a drop would produce an oversold condition by sending the 10 day moving average of advancing issues down to the dark green horizontal line on the chart. This in turn would set up a rally to an April top somewhere above the 1300 level.