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By March 7, 2016 0 Comments

We Need to Digest the Feast Before Rallying Again

The Market I held a Twitter Poll on Friday. I asked if folks thought the S&P would close over or under 2050 by the end of March. Please keep in mind the S&P was trading just shy of 2000 at the time and the end of March is still three weeks away. That allowed for another 3% of upside through the end of the quarter. Immediately I was bombarded by comments that my poll was not going to capture sentiment well enough. Folks argued that since we were so close to 2000 on the S&P I should use 2000. Quite frankly, to ask if we will close over 2000 when we’re trading right near there and still have three weeks to go didn’t seem right to me, but I caved to the pressure and did a second poll, asking if we would close over or under 2000 by the end of March. So the question for the second poll is essentially, “can we hold on to the rally we have?” Will it surprise you that in both polls the majority voted the under? Please recall back in early November, when Twitter first started doing polls, I took a poll asking if we’d close the year over or under S&P 2100. The majority took the over. In fact, I did a few more polls as we headed into the end of the year and each time folks took the over. As you know we did not close over 2100 and closed on a rather sour note. I have only done a few polls since the year began, but each time folks have taken the under. So, there’s a definite change in sentiment in 2016 vs. 2015. If you would prefer a more professional view of sentiment, then I would note that the consensus bulls, who were at 44% at the recent low were already at 65% by mid-November and are now hovering at 48%. I expect we will see this higher in the coming week, but quite frankly I’m surprised it has only gained four points.

OK, there are some short-term signs of giddiness. The ISE Equity ratio, after being over 200% earlier last week, sunk under 100% on Friday. The last time we saw so many extremes so close together like that was the final week of 2015 and we know how the first week of the year began. This movement in the ISE Equity Ratio has, for the first time in a month, moved the 10-day moving average to turn down.

Then there is the overbought reading I have been harping on about for the last week. I’d like you to envision you’ve just eaten a Thanksgiving feast and are so full you can eat no more. Then dessert shows up and you think, well OK, just a little bite more. So you have some dessert even though you know you shouldn’t. The next move is to either open your pants or stop eating because you simply cannot continue to gorge yourself. That’s pretty much the state of the current overbought situation in the market. Volume on Jan. 20 on the NYSE was 6.4 billion shares. It was the highest volume we’d seen without it being an expiration day. That was the day so many of 2015’s have-nots saw capitulation. On Friday we saw volume on the NYSE push just over 6 billion shares, also quite high for a non-expiration day. Many stocks saw capitulation on Friday, but this time it was shorts capitulating so the stocks went up and reversed. Take a look at the chart of 3D Systems (DDD:NYSE), which I recommended here not long ago. That reversal on volume looks like the inverse of that January low (although the January low in this case lacked the volume surge). …

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