HeadlineCharts.blog.com

There was a big error in my analysis of yesterday's sentiment post regarding the put/call chart, which I have now corrected.

The ECRI economic index inched higher this week indicating that economic activity has stabilized at lower levels.  This is after a gigantic drop over the past couple months.  The ECRI index looks out about 4-6 months and sees substantially lower economic growth but not a recession.  Also, their inflation gauge remains subdued indicating inflation remains well contained.

These bullish percents are solidly confirming the equity market.  The total volume may not be great, but since the huge rally off the Fed rate cut, investors have used every pull back to accumulate shares which is very bullish.  Also, most areas of the market are being pulled higher which is also bullish.  The Fed and the Tape are clearly in sync heading upward.

Last week we noted that there is at least one important area of the market that hasn't kept up with the general upward trend.  The Transports index isn't confirming the equity market advance, and this is an important negative divergence.  Of course, hanging overhead for transportation is very high oil prices and its sensitivity to a weak economy, so it isn't too surprising this area is underperforming.  But if oil prices stabilize in the low 80 range, I think we may see this index pulled higher by the rest of the market and break out above current levels. 

Above is a look at five areas of the intermarket at important technical points.  I'm thinking all five will continue their current trends, but I'm certainly ready to adjust if I'm wrong.  Stocks, gold, and gold shares will probably continue higher, and the US Dollar lower.  I'm not entirely sure about long-term rates though.

The bloggers, individuals and newsletter writers have all become very bullish and very quickly, and from a contrarian sentiment point of view, it is negative towards stocks.  The individuals and bloggers were very negative towards stocks during the entire bull rally from late summer 2006 through the sell off in July of this year.  But they really seem to like the current rally?  Maybe they are seeing the light at the end of the tunnel ahead for the housing crisis?  More likely, they regret being on the wrong side of the market for so long and have decided to adhere to  ... don't fight the tape and don't fight the Fed. 

The put/call ratio is still very bullish from a contrarian sentiment point-of-view.  Generally, the lows in this put/call moving average have been good times to start thinking about getting defensive towards the market.  This chart shows the put/call ma hasn't really even started to roll over yet, which is usually a bullish sign. 

The survey information above can be obtained for free via the following sites.  Investor's Intelligence is from Market Harmonics.  Individual Investors is from aaii.com.  Low Risk is from lowrisk.com.  Birinyi Bloggers is from Ticker Sense.  For additional information about market sentiment, I recommend a blog by Brent Leonard.

Sentiment analysis is an important component when following the markets, and is considered a “contrary” indicator.  Contrary because if too many people are bearish then there aren't enough sellers left, the balance tips to buyers, and the market starts to advance.  If too many people are bullish, most funds are already invested, the balance tips to sellers and the market weakens.  One way to determine if investors are bearish or bullish is by taking surveys and tracking at what levels these polls indicate investors are at the extremes of bearish or bullish sentiment.

Keep in mind, sentiment analysis is not a science and only provides very general information.  Sentiment is not a signal to take action, but provides background about the current state of the markets.  For instance, there have been many occasions when bullishness reached high levels well before the market started to weaken.

Below is the weekly look at how well commodity prices and currencies are holding up, and I have highlighted in green the commodities and currencies hitting new highs or in very strong trends.  These commodity prices are generally very strong, and are not anticipating an economic slowdown, and that is obviously good news for stocks (and jobs).  Also, the companies that produce these commodities continue to be excellent investment opportunities.

Regarding Market Vane, this is a sentiment survey of commodity futures advisors, and is used by futures traders.  It has been  bullish for a long time, although is below the 70-75 level where it spent a lot of time prior to this summer.  I had been using it as a contrarian indicator.  However, the publisher states that it is better used as an indication of the current short-term trend, with the idea that investments in commodity futures should be in line with the trend.  So this survey has to be viewed separately from the others.  I think it remains favorable towards commodities, but not as red-hot as last winter and spring.

The CRB is heavily energy-weighted.  No surprise it has broken out above resistance headed towards the highs of the spring of 2006.  As long as this index remains in an uptrend, but doesn't move too high too fast, it is favorable for the economy and for the stock market.

Yesterday, the new lows for both exchanges exceeded new highs, and that is not what you want to see in rally mode.  But today the new highs recovered nicely.  I'm keeping an eye on these new highs /new lows to make sure they are confirming the market.  For now, they look good.

The bullish percents continue to look solid, also confirming the uptrend in prices. 

Above is the TOF ratio I learned about from the dk-report blog, and it continues to confirm the market uptrend.

Rates on the shorter durations have dropped quite a bit since June.  The US Dollar has plummetted and the Fed lowered rates, yet the 10 and 30-year rates are still below the 40-week moving average.  Bond investors couldn't be too worried about inflation with long duration rates at these levels.  Perhaps that will change in the coming weeks, particularly if the Fed chooses to continue lowering Fed Funds.  I thought these rates would be higher by now, but let's hope they stay just about where they are in order to help the mortgage market.  Also, at these levels, rates are favorable towards equities.

The US Dollar is right at long-term support dating to 1992.  The RSI is dipping into oversold meaning that the US Dollar could start to bounce higher soon.  But when the RSI dips into oversold, it generally means there will be another test of lows following the bounce. 

Some people think the US Dollar has nothing to do with the stock market.  Other people think with the US Dollar so low, US stocks become an irresistable bargain for foreigners.  I'm more of a believer in the conventional wisdom and think that as long as the US Dollar is weak, foreign money is not going to flow into US stocks because overseas investors will ultimately lose when they cash out and exchange back to their own currency. 

Last Friday's ECRI economic index was a bit encouraging after a scary plunge over the past few months.  The index finally stabilized at a low level.  It looks forward about 4-6 months, and it indicates weak but still growing economic activity. In other words, no recession, at least not yet.  Also, the inflation indicator remains at low levels.

A 3-year review of the intermarket is shown above.  Nothing too surprising is shown except perhaps that bonds have traded sideways within a range of 105-115 for a couple years now.  Commodities have broken above short-term resistance, and the US Dollar continues its steady decline.  We are most interested in equities, which remain in a strong uptrend.  After last week's big up move, and since the index is near resistance, we may get a pull back in prices to the break out support level.

Disclaimer: All charts and comments are intended for education and discussion purposes only. No investment recommendations are being offered. Please do your own research and take responsibility for all investment decisions that you make. Questions and comments related to this post are encouraged.  | MON - Sector Strength | TUE - Interest Rates | WED - Market Breadth | THU - Commodities & Currencies | FRI - Market Sentiment | SAT - Bullish Percents | About | contact: HeadlineCharts@gmail.com |

Short interest has shot right back up to prior highs...  The bearish shorts were right about the market in July, but generally high levels of short interest is a bullish sign from contrary sentiment point of view.  I'm not sure what to think.

Disclaimer: All charts and comments are intended for education and discussion purposes only. No investment recommendations are being offered. Please do your own research and take responsibility for all investment decisions that you make. Questions and comments related to this post are encouraged.  | MON - Sector Strength | TUE - Interest Rates | WED - Market Breadth | THU - Commodities & Currencies | FRI - Market Sentiment | SAT - Bullish Percents | About | contact: HeadlineCharts@gmail.com |

Before looking at the bullish percents, let's acknowledge this terrific call by IBD.  The Commodity review has been posted.  The Sentiment post is also complete.  Sorry for the delay. 

Not a bad week in the stock market.  Lot's of bullish percents confirming the move higher in prices.  The NYSE is perhaps the most important bp, and it is now above the 50% level and headed upwards.  The NASDAQ has shifted to a P&F uptrend as well, and moved into the 40% level... and we're now looking for a break above the 50% level to re-affirm the market uptrend.  The Industrials and S&P100 are in the overbought range, so purchases are best made at pull backs.

Gold and Silver shares were a big story this week, and the bp is responding well and in good field position.  The large cap gold stocks are already extended, and most of the small caps are just now starting to awaken from their long consolidation slumber starting in the spring 2006.

The Utilities show a good looking bp chart above which has issue a terrific buy signal with a very close stop out point.  Generally Utilities benefit from lower rates because of their strong dividends, and large amount of debt as mentioned by Arthur Hill this week.  They also benefit from higher natural gas prices which I think we'll see soon due to its clean energy status, and the tendenancy of natural gas prices to be pulled higher when oil prices are surging.

The sentiment levels have very quickly moved up to uncomfortably high levels for both the newsletter writers and the individual investors.  Investor's Intelligence wasn't too concerned about this level of bullishness for the newsletter writers, but it seems to me this level of bullishness has happened too soon after reaching the lows in August.  However, after such a bullish move by the Fed perhaps I'm being overly cautious.

Viewing the bullish vs bearish sentiment from the chart above seems a bit less alarming.  The trend is working against stocks as the bulls increase and the bears receed, but still this is an unwelcome, sharp reversal.

The US Dollar continues to be weak while all other currencies continue to be strong in relation to it... and particularly the currencies of the commodity producing countries such as Canada, Australia and New Zealand.  As a result of the weak US Dollar, and the strong global economy, commodity prices are booming led by oil, agriculture, and now gold.

The commodity producing stocks are the place to be.  They have been for a while, and probably will be for a while longer, at least until the global economy slows.  The risks to the global economy are that high oil prices strain economic activity, or the China stock market corrects significantly, or that mortgage and credit problems spread throughout, or war in the middle east with Syria or Iran.  Of course, I'm not telling you anything you don't already know.  For now, higher commodity prices mean strong economies and that is favorable for stocks.

Higher oil prices often means higher natural gas prices.  I like natural gas long-term because of high oil prices... because natural gas is domestically produced... and because natural gas is cleaner burning than oil.

I wish I had something to show you that you haven't seen or heard from a million other sources already.  Gold is just breaking out of a considerable consolidation.  The shares are outperforming the metal and the shares are outperforming the broader stock market.