Thursday, July 26, 2012

bearish market sentiment means higher prices ahead

Here is a pair of charts I think you will find interesting. The top chart is a daily bar chart of the cash S&P 500 going back to the May 2011 top. The bottom chart shows the five week (blue) and the 10 week (red) moving averages of bearish sentiment recorded by the AAII  weekly sentiment survey. The weekly number is obtained by dividing the bearish percentage by the sum of the bearish and bullish percentages (thus ignoring neutral market views).

You can see that the moving averages of this bearish percentage are at levels last seen at the 2010 and 2011 market low points. Yet as you can see in the top chart the S&P 500 is only about 4% below its March 2012 high near 1420. I think this means that the market is going to have to go a lot higher than it is now before bearish sentiment drops to levels last seen near the 2010 and 2011 tops.

On a purely mechanical basis the bull market in stocks is still on good footing. The market is visibly above its 200 day moving average (red line) which itself is rising. So excessive bearish sentiment in such a situation is doubly bullish.

For you Lindsay fans out there let me say that this is evidence that point 23 of the domed house still lies ahead of us. If a domed house really is developing the top should be somewhere in the 1450-1500 zone.

1 comment:

Markus said...

Hi Carl,

How does the (contrarian) view on bearish sentiment fit together with an observed+confirmed Hindenburgh omen (see )? The move up today seems to come from the FX market (Euro retrace) IMHO.