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US Markets: Is a Two-Day Decline All That Important?

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    May 28, 2013

    Gentle Ben made noises about beginning to take the punch bowl of stimulus away, and just the thought of it spooked markets around the world.

    Well, for a day or two anyway.

    At least it gives pundits and columnists something different to talk about and debate. For four weeks it has been boringly one-sided observations that the rally was apparently unstoppable, and passing along Wall Street’s reasons for believing this time is different, that the market need not worry about situations like the slowing economy and earnings, the high level of investor bullish sentiment, or even the overbought condition, because global central banks, including the Fed, were flooding their respective financial systems with endless amounts of excess liquidity, and that was going to continue at least into 2014.

    Now after just two down-days, two-sided debates are all the rage again, ranging from ‘buy the dip’ to ‘this a major top’, and all potential scenarios in between.

    It’s like two or three down-days in a row are so unusual they must mean something important.

    But of course that is just against the backdrop of the previous four weeks of straight-up rally with almost no down days since the March-mid-April stumble.

    The exciting four weeks of subsequent rally had all but wiped out the memory of the volatility and downward bias in the March to mid-April period, when two or three straight days down were common.






    It will take more than a day or two of negative market reaction to Bernanke’s remarks to determine the market’s direction. But it does have the overbought conditions and other negatives at least being considered again.

    Investor Sentiment.

    As we have been noting for several weeks, investor sentiment by most measurements had reached high levels of bullishness usually seen at rally, and even bull market, tops. They included the NAAIM Sentiment Index (National Association of Active Investor Managers), the Investors Intelligence Sentiment Index (newsletter writers), the Consensus Inc. Sentiment Index, the Credit Suisse Fear Barometer, etc.

    But the poll of its members by the American Association of Individual Investors (AAII) was strangely out of synch with the rest, showing about an equal number of bulls and bears, a neutral reading.

    It’s interesting that this week’s AAII poll, released Wednesday night, finally spiked up to its high bullishness zone, bullishness jumping to 49.0%, bearishness dropping to just 21.6%.

    And the market’s big tumble took place the very next day, Thursday.

    It was also interesting that an article in The Financial Times on Tuesday, talking of ‘dumb money’ versus ‘smart money’, reported that the rush of retail investors piling into the Japanese market, (chasing by far the hottest market since the November low) reached a record inflow the previous week, while hedge funds, who were timely with their heavy buying in November, have been taking profits and reducing their exposure.

    And that record inflow by retail investors the previous week was just in time for Wednesday night’s big 7.3% plunge by the Nikkei.

    But those are just meaningless observations.

    As we continuously point out, investor sentiment does not provide buy or sell signals. It only provides indications of risk. It can remain at high levels of extreme bullishness (near tops) or extreme bearishness (near bottoms) for extended periods of time, and can continue to higher levels than were seen as the extremes in previous times. For instance, rallies have ended when the AAII bullish percentage reached 47 and 48%, but it reached 75% bullish in the euphoria of late 1999 just before the 2000-2002 crash, and 55% just before the 2007 bull market topped out. 

    Only technical indicators provide actual buy and sell signals.

    Japan is typical, but extreme, example of uncertainty for investors.

    The Japanese market’s sharp stumble this week re-awakened realization that markets can move in both directions.

    But take a look at how it provides fuel  for both bulls and bears if, for instance, only the overbought condition is considered, and not all factors.

    For the bulls, as serious as a one-day 7.3% plunge sounds (the equivalent of a more than 1,000 point one-day plunge by the Dow), the plunge was not even enough to pull the Nikkei back to a normal retest of the support at its 50-day m.a., seemingly unimportant.


    But for the bears, the Nikkei is so unusually overbought long-term above its long-term 200-day (40 week) m.a. that even a 7% decline hardly shows on the long-term chart, illustrating the risk of the overbought condition, and why they are taking profits, and why chasing this rally could end vey badly.


    Plenty of fodder for both bulls and bears.

    To read my weekend newspaper column click here:  There’s More To Consider Than Just The Fed!

    Subscribers to Street Smart Report: In addition to the charts and recommendations in the subscribers’  ‘Premium Content’ area of this blog, there is an in-depth U.S. Market Signals and Recommendations from Wednesday in your secure area of the Street Smart Report website. The next issue of the newsletter will be out next Wednesday.

    Images: Flickr (licence attribution)

    About The Author


    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

    It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.

    It provides two model portfolios as guides. One is based on ourSeasonal Timing Strategy, one on our Market-Timing Strategy.

    In depth updates are provided every Wednesday, with interim ‘hotline’ updates every time we make a trade. An 8-page traditional newsletter Street Smart Report is provided on the website every 3 weeks, in pdf format for viewing or printing out.

    There is the Street Smart School of online technical analysis ‘seminars’,commentaries to keep you ‘street smart’ about Wall Street, and much more.