June 10th, 2010

Market Sentiment and Momentum has Clearly Waned

Don’t you wish you had some way of keeping tabs on how many talking heads were bullish and how many bearish? Or knowing whether institutional investors were, on balance, buyers or sellers? How about individual investors. How many long-term buy-and-holders are predominantly sticking with their stocks or throwing in the towel because they can’t tolerate the damage done to their retirement accounts; are short-term traders net buyers or net sellers.

There may not be a way of taking those polls but you still can get a sense of how investors of all sorts are feeling about the market and the strength and momentum of their convictions through the willingness they demonstrate in demand for or disposal of stocks.

I consider moving averages to be one of the best gauge of sentiment and momentum. What we see, in the following chart, is the market on the verge of signaling an important change in investor and trader sentiment through the movements of those indicator (click on image to enlarge):

Think of the four moving averages as the polling results of four different cohorts of of investors, each with different investment styles and philosophies. You see that the shorter-term investors have turned bearish since they have been unable to sustain most recent prices; the 50-day moving average turned down and is within striking distance (1.38%) of crossing under the 100-dma.

The 100-day moving average turned down at approximately the same time as the 50-dma and it, too, is directed towards crossing under the 200-dma (1.24%). If investors and traders don’t rush in with sufficient demand sustained long enough to bid the index above these moving averages then the cross-under’s will soon take place (some call the 50-dma crossing under the 200-dma a “Black Cross”).

Whether you characterize the market’s action since last October as an “ascending broadening wedge”, as I have, or a head-and-shoulders top, there is a bottom boundary trendline to either pattern. In the case of the wedge, it could be approximately where the solid red line is and, for the h+s, it’s approximately the dotted line. The wedge’s lower support boundary has already been violated but the h+s boundary held support in two assault attempts, the “flash crash” and yesterday. Both trendlines will soon converged with the 300-dma, so penetrating below the 1040 area with volume carries doubled risk of further declines.

For the time being, the buy-and-holders are clinging to their belief that the bull market recovery that began with what is now being labeled a “generational bottom” last March 9 is still in tact because the 300-day moving average is still ascending. The decline has been fairly steep and deep so it’s reasonable to assume that long-term investors will be looking for some recovery of what they consider an “oversold” market. Unfortunately, if that recovery is tepid and fails to cross back above the descending moving averages (in other words, if traders remain skeptical and don’t jump on the band wagon en mass) the Index/market will continue falling and a Black Cross won’t be avoided.

The sentiment and momentum of virtually all types of investors and traders has been damaged. Whatever confidence that emerged from avoiding a banking crises is quickly dissipating. The risks now seen are sufficient enough to cause most investors and traders to cast their votes with avoiding the market and remaining on the sidelines. A new spark is needed in addition to low prices to reignite demand for stocks among traders and investors of all types. I’m not sure what it will be but I’m confident it will come because it always has and always does. We just don’t know when or from where.

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  • Anonymous

    Sounds like the bottom is in when evryone wants out. Future patterns and signals should not be ignored nor should they be a technical reason to sell. Once the pattern is defined and the signal occurs then one can gtake action. I believe technically until the SP500 falls below 1040 then the next leg of the correction could follow. On the otherhand if it reaches 1110 then the bullish signal will cause a resumption in the market until the next pattern defines the direction. Notwithstanding the negative news repeating and re-repeating, the market has and is consolidating here between 1040-1110. The momentum still remains on the upside and if there is further downside this allows the investor but not the trader to buy on weakness. The funies are just too good and once realized will cause the equity markets to go much higher. The charts must be listened to and not a premature reading of them. The investor can stay in. We are well above any bullish support lines.

  • babaro

    Way too many people try to shock their audience with bold predictions. I like to take things one at the time. The most important resistance level is around 1100-1,1110 where the SMA200 resides. If we pass this level everything else is going to be much more easier for bulls. A big IF of course.

    I do agree that SMA200 was not the support moving average during the 2003-2007 so one should not read too much into crossing this MA on the downside. I also pay attention where is SMA200 pointing which is up right and as long as it stays this way I won't worry about market going back into the bear market. Not that I care since I am not a perma-bull in any case.

    If you have time and if you want you may look at my blog where I am posting daily updates on stock market. I am pretty sure about my timing methods but not sure enough not to read what other people are thinking so I am really glad I discovered you site.

    All the best!