March 28th, 2012

Just 10% to previous all-time high

Conversation on CNBC the other morning centered on why so many financial managers, hedge funds, institutional and individual investors are skeptical about the sustainability of the market’s strength.  The debate revolved around whether the skepticism results from the global situation, strength of the domestic economy, Federal budget deficit and its fix, the outcome of the upcoming Presidential election or any of a half dozen more reasons?

I wish, however, there had been a “none of the above” choice because I think the answer may actually lie in basic investor psychology.  The answer is as fundamental as the difference in perception, the mind’s eye, between a recovery move higher and a move higher into all-time new high territory.  When an individual stock or the market as a whole descends the far side of a valley in a crash or correction it leaves pivot point markers which serve as resistance levels on the near side as it ascends from the valley’s bottom [and for those doubters let me say there always is a bottom except for tulip bulbs and perhaps the Japanese stock market].  Those pivot point markers were the failed attempts to find and create the bottom.

After actually making a bottom and reversing, those earlier failed attempts often mark the approximate levels where fear takes hold that the recovery will fail again fueled by those who rationalize or explain why the recovery will fail and the market or stock will will turn lower again.  Remember all the talk back in 2009 about the S&P’s “double-top” that would lead to a final Wave 3 descent to below 600?  In August 2009, I wrote:

there are the Elliott Wavers led by Prechter who claim that a “Primary Wave 3″ down will soon get underway because “the DJIA has now retraced a Fibonacci 38.2% of the 2007-2009 plunge in stock prices, meeting a minimum threshold for the completion of the Primary Wave 2 rebound”. One Elliottician blogger also believes that

“the next wave down will likely entail the collapse of Western Civilization. Given the precipice of history at which the world stands, I’m hurrying to complete my thesis regarding the creative insanity of man. There’s a possibility of global nuclear war by mid-October according to my analysis.”

It was pure malarkey then and it is today.

But when the market or a stock ascends ever higher into all-time high high territory there are no benchmarks on the facing wall, no earlier pivot points where optimism slowed the fall which could now turn into skepticism and hesitation about the ascent.  Once the ceiling is penetrated, fears and reservations don’t stop the ascent but overconfidence, irrational exuberance and mania will.

Consider the S&P 500 in two alternative periods; the current secular bear market and the other the 1982-2000 bull market (click on images to enlarge):

But what does 10 or 15 years of stock market history have to do with investment decisions today?  What does it have to do with the explanations for investor skepticism given by those CNBC talking heads the other morning?  The relevance comes from the omission of one important fact not mentioned in the whole discussion:  the approach of one of the most significant pivot point benchmarks of the last 12 years …. the previous all time high, a mere 10% away from the market’s current level.  (To be technically correct, there is one other lessor precursor pivot point at around 1450 emanating from the other side of the Financial Crisis Crash valley that has to be crossed before the market can break into the clear, blue, cloudless skies of all-time new highs territory at around 1565.)

While the market is still 10% below its previous all-time high made in 2007, close to 40% of stocks are now trading higher than their highs of 2007 including such well-known leaders as QCOR, PCLN, GMCR, REGN, HSTM, SHOO and PRGO.

The secular bear market won’t die easily and it may yet survive forcing us to live through another major decline (that’s from where all that skepticism originates).  But then again, those talking heads haven’t yet had sufficient reason to think up the explanations and rationalizations for why the market will break through the resistance into blue skies.  But my guess is that they’ll have to start looking for them towards the end of this year.

March 19th, 2012

Would I buy the stock today if I didn’t own it?

I can’t believe it’s been two weeks since my last post.  Please accept my apologies.  I’ve been doing exactly what I said I would do in that March 2nd post, I’ve been “shooting fish in a barrel”.  And for the time being, I believe my fishing respite is coming to a close.

The market crossed above April’s high and is slowly climbing to what might be the next resistance at approximately 1435-1440, or a mere 2.5% above Friday’s close.  Last week, the market ended 2.43% higher for the week so the next resistance may be reached by the end of this coming week.

Why could 1435-1440 be the next resistance area?  Not because so many others are talking about it (and they may because they look at the same charts) but because that’s approximately the level of the higher of two alternative necklines of the 2007-2008 reversal top of the 2007-2009 Financial Crisis Crash.  The lower is where last year’s correction began and the extension of the upper neckline is where the market is heading next.

It would be nice to think that once the market recovers a trend will continue unabated for an extended time.  Unfortunately and disappointingly, that’s not the way market’s work.  The market has risen 16.49% since December 16 and needs to digest this extended move.

I’m guessing that the market was recovering from the 2007-2009 Financial Crisis Crash until the European Debt crisis and the Congressional Federal budget stalemate last year stopped it in its tracks.  Even though we will soon enter a consolidation there should be plenty of further room on the upside before a major correction along the lines of last year’s.  Too many stocks haven’t yet fully participated in the unbelievably beautiful, stealth bull market that’s occurred since the beginning of the year.  For example, even though many of the banks and other financial stocks have led the market higher so far this year, most are still just now crossing the necklines in their chart patterns indicating that there should be another an equal amount of appreciate left in their move.

The challenge up to now has been to put money back to work without severely increasing risk.  The next several weeks will present a different sort of challenge: determining which stocks you own are 1) consolidating previous gains, 2) late bloomers and will begin their move after the market correction or 3) will be forever doomed and should be sold.  Here are examples of some that I’m evaluating:

  • BR: I recently added this stock on the expectation that a strong market will help it cross above its long-term resistance into all-time new high territory.  Was I premature by not waiting for that cross?  I didn’t follow a discipline of buying only after a breakout and now wonder whether I will soon pay the price of that violation.
  • EMN: Purchased the stock in the hope that the “buyers’ remorse” correction had ended and it was able to realize the potential of its ability to cross into all-time new high territory.  Should I patiently wait for that realization or should the stock be abandoned while I can exit with a small profit.
  • EXPE: Another stock I purchased on the expectation that a strong market will help it cross above a long-term resistance level.  But now a market consolidates will probably hinder the stock’s ability to cross above the upper boundary of the ascending channel and the long-term resistance level.  Wait it out or sell?  That is the question.

I’ve always found that the simplest way of deciding whether to hold on to a stock is thinking the mirror image of the question: “Would I buy the stock today if I didn’t own it?

February 29th, 2012

What Color is You Stock Chart?

When it comes to the stock market, you want certainty and equivocation just won’t do.  Is the market going higher or lower?  Will a stock appreciate 20% and when?  However, the first thing you need to establish, whether from the investment adviser or, if you’re a self-directed investor making your own stock selection and investment decisions, is the bias and prejudice about the market’s future direction, whether the opinion is based on an optimistic or pessimistic view of the market’s future.  This is true regardless whether you follow the fundamental or technical approach.

I’ve often said that while charts don’t predict the future they are an excellent tool for timing investment decisions.  They do help in deciding whether a stock is about to embark on a trend move in one direction or another, whether it’s in the middle of one or if a trend move had  begun so long ago as to now be on the verge of ending.

We long ago established that general market trends drive approximately 50% of the fluctuation of individual stocks’ prices (if not in terms of the percentage change then at least the direction).  Therefore, the adviser’s or investor’s biases and prejudices overall market view, whether they are bullish or bearish with regard to the market will color their interpretation of each stock chart.  My own bias was brought home clearly as I was preparing today’s Instant Alert for members.

Instant Alerts documents for members each trade I make in my own personal account and the chart I used to make the decision.  I made three trades today and, as I was writing them up, I realized the different conclusions that could have been arrived from three charts based on whether one was an optimist or pessimist, a bull or bear.

  • This stock’s long-term chart mirrors the general market in that it’s been trapped in a “secular bear market” for the past 12 years between 18 and approximately 60; it is now at the upper boundary of that range. If you’re bullish and believe that the market is destined to move higher from here then you should believe that the stock likely will cross above the upper boundary and enter all-time new high territory.  If you’re bearish, then the upper boundary represents an impenetrable barrier that won’t be crossed in the near future.
  • This stock has an extremely interesting pattern which, like many others now, could be interpreted as either a reversal top or a consolidation depending on your outlook (bull or bear) and the market’s future direction.  One can see in the chart either a partially-completed “double head-and-shoulders” reversal top or a horizontal consolidation channel with a possible near-term cross above the upper boundary. 
  • This stock has been trapped in a 12-mos. consolidation pattern.  Whether you see a horizontal channel, a future inverted head-and-shoulders or a partially formed cup-and-handle doesn’t really matter that much.  The point is that a breakthrough on the upside with a strong market as tailwind could lead to substantially higher prices.  But then again, if the market weakens, then the pattern could just as easily turn out to be a reversal top.

Bottom line?  You can see consolidations or reversals in your charts but, in most cases, what it actually turns out to be in the end all depends on the market’s future direction as to what the pattern will later be called.

February 17th, 2012

The Gestation and Rebirth of “Buy and Hold”

As January ended, I reiterated a hypothesis that the market was following the script written at the end of the 1970’s secular bear market by writing in That Old 1978-82 Analog Again,

“On the one hand, we might actually be escaping the Bear Market sooner than I had originally anticipated but, on the other hand, the analog may still be in play and we’re looking at a possible reversal for the remainder of 2012 in order to get back closer to the analog.  I guess if I had to choose between swallowing my pride at having missed a “forecast” and accepting the upside break out or meeting the forecast but delaying the opportunity of seeing a higher market again ….. I’ll live with having missed a forecast.”

Compare the two secular bear markets, note the similarity and draw your own conclusions (click on image to enlarge):

  • 1969-1980
  • 1999-2012

Combining the two charts in sequence produces the now familiar view:

For the past 5-10 years we’ve been listening to the mantra “Buy and Hold is Dead”.  Just do a search on the term and you see books, videos, TV clips, articles and blog posts …. I’ve probably even wrote it here several times over the past 6 years of this blog’s existence.  Not to be just a contrarian but because I believe it might be true, I now offer a heresy.  If we are witnessing the death of the current secular bear market might we not also be seeing the rebirth of buy and hold?

If the market over the next several quarter into early 2013 is laying the groundwork for a new bull market might it not be the right time to load up on stocks with great growth potential that you’ll want to hold for several years through several corrections?  It begins not with the search for specific names but with a reorientation of mindset to accept the possibility that the market can and will exit the secular bear market by crossing above the previous highs and finally move into uncharted waters.

Let me know if I’m being a cock-eyed optimist or that it might actually turn out to be a plausible scenario.

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February 9th, 2012

Will the Market Soon Cross into All-time New-High Territory?

There’s no question about it, I’m definitely in the minority.  First I wrote a piece entitled “KISS in Market Timing Too” in which I compared my approach to a complex algorithm developed by Ciovacco Capital Management called the Bull Market Sustainability Index (BMSI).

I followed that up with a piece yesterday entitled Market Momentum Turning, But Will It Accelerate? in which I see each of the four moving averages that I use in my Market Momentum Meter market timing tool having turned up and soon approaching a perfect bullish alignment (50-dma>100-dma>200-dma>300-dma).

Now I see something written by Ray Barros in Green Faucet entitled “S&P Nearing A Top?” in which he lists the following six indicators that have convinced him that the market is just one step like the failure of Greece debt negotiations away from collapsing into a bear market. Those six technical indicators are:

  • Price – Structure: The 12-Month Swing and 13-week swing show we are in a sell zone. Figure 3 shows that since the Dec 2, 2011 that the up move has been on declining volume and range. In this context this is bearish.
  • Time: Kress Cycles suggest we are in a window when a top is likely.
  • Momentum: Figure 4 shows that this up move has been on declining momentum.
  • Sentiment: The sentiment indicators I use suggest the S&P is skewed to the upside.
  • Normalised Volume: We saw a sell setup with ‘below normal range’ and ‘normal volume’.
  • PoMo: For me, this indicator generated a sell signal today.

He even includes charts depicting each of the above as supporting evidence like the one below:

However, I looked at those charts and what struck me was that: 1) they were so complicated and there was so much to digest that I couldn’t possibly make heads or tails of them and 2) I wondered what those signals might indicate if we hadn’t been in a secular bear market for the past 11 years.

The answer to his question of whether the market is approaching a top is definitely yes!  I have little doubt that the market will approach the previous all-time high of 1576 sometime this year or next.  The correct question to ask is will the market soon scale to new heights and cross into all-time new-high territory?”  Since my Market Momentum Meter is turning bullish at these loft levels, I hope the answer is yes and I think the answer will be yes.

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February 8th, 2012

Market Momentum Turning, But Will It Accelerate?

Many decry the lack of volume, conviction on the part of most individual investors, the lack of excitement about a market that just doesn’t seem to want to turn lower but instead inexorably continues to move higher.  Beneath the surface and behind the scenes, however, something is happening.  Many aren’t aware of it because of their focus always on today’s “Breaking News”, earnings reports or press releases.  What most don’t see is the change that’s taking place in the form of a slow turnaround in the trend of market momentum as measured by the moving averages.

In a piece entitled “Sweet Dreams” way back on October 14, 2010, I wrote:

…… have you taken a look recently at how the four moving averages (50- ,100- ,200- and 300-day) are converging as they were all trying to squeeze through the neck of a bottle? (click on image to enlarge)

First, it’s important to note that sometime next week, the dreaded “Death Cross” of the 50-dma crossing under the 200-dma that we were so fearful of at the beginning of July will be reversed and, by definition, will become the “Golden Cross”.

Also note that the four moving averages are transforming themselves into a bullish alignment so long as the Index itself remains above them all for the next month or so. That’s pretty monumental because it is a solid confirmation that a bull market is in place.

A few days before I’d written this piece, Europe’s Finance Ministers approved a rescue package worth €750 billion aimed at ensuring financial stability across Europe by creating the European Financial Stability Facility (EFSF); six months later (May 2011), our stock market was 16% higher.

But the situation in Europe appeared to continue deteriorating. It became evident then that due to its severe economic crisis, Greece’s tax revenues were lower than expected making it even harder for it to meet its fiscal goals. Following the findings of a bilateral EU-IMF audit in June, further austerity measures were called for while Standard and Poor’s downgraded Greece’s sovereign debt rating to CCC, the lowest in the world.  Simultaneously, our stock market seemed to hit a wall; it cratered in August 2011.

The market now seems to be again trying to squeeze through the neck of that same bottle.  Last week, the Black Cross again turned back to Gold and  all four moving averages finally turned up this week.  Within a month or six weeks, the four moving averages will right themselves and we’ll see them in a perfect bullish alignment again.  Note the similarity between the 2010 above and what it looks like today:

I wrote to my members at the end of January that

“Going back 50 years, there haven’t been many periods when this convergence [of moving averages] has existed outside of market turns and that’s why I believe the market will soon begin trending higher. Obviously my anticipation isn’t based on an astute distillation and analysis of domestic or international economic and financial data. This prognosis is based on my read of the history of market psychology and behavior.”

The convergence continues to unfold.  Psychology is changing to match the more positive economic news.  We have begun adding to our positions with focus on select Industry Groups.  If there won’t be another surprise to hit us from left field (not intended as a reference to the elections this November) then we should continue putting cash to work as momentum begins really accelerating.

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January 25th, 2012

“The Great Convergence”

In last week’s Recap Report recently sent to subscribers, I wrote and included the following chart:

“….. at the risk of being labelled melodramatic …. I see “The Great Convergence” coming to a head and finally getting resolved with the 18-month struggle between bulls and bears with (I hope it’s not just wishful thinking but an actuality) the bulls finally gaining the upper hand and finally being able to break into new higher ground.”

After today’s close and after closing higher for 20 of the last 23 trading days, the market is now up 10.01% since December 19.  Even more important is to note that today’s close was at 1326.06, almost exactly the level many chartists have touted as the breakout point that confirms an exit from this summer’s bear market and the continuation of last year’s bull market run off the lows.

It should also be noted that it’s almost exactly where the descending trendline connecting the 2007 and 2011 peaks is today.  However, rather than thinking in terms of points (e.g., 1325 or 1326) we need to think of a zone.  Every single trader doesn’t simultaneously decide to buy or sell which in turn causes a reversal at a single point.  Furthermore, the Index is composed of 500 different stocks in every economic sector and each of these stocks will have their own underlying market dynamics.  Market psychology does change when the market hits various levels but a change of psychology happens over time.

What the above chart indicates is a change in market psychology that’s been on-going since the bottom of the Financial Crisis Crash (see “Revisiting Housing and Banking With a New Ending” of a few days ago).  The ascending trendline since the bottom (higher lows) and the descending trendline from the pre-crash peak (lower highs) results in this “Great Convergence”.  The best momentum indicator (in my book) of moving averages across multiple time horizons are turning constructive adding to the conviction that a clear-cut signal to put, as they say in Wall Street, “risk back on”.

I believe there needs to be a 4-6% consolidation of this 10%, 23-day run and we’re going to look at it as a buying opportunity.  But if the market continues to zoom ahead another 2-3% without that correction, then it’s “damn the torpedoes, full speed ahead.”

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January 10th, 2012

Modern-Day Patent Medicine Salesmen

Bob Prechter and his Elliott Wave newsletters never fail to intrigue me.  Over the years, I’ve tried to understand the basic concepts behind Elliott Waves and Fibonacci wave counting but to no avail.  I just don’t get it.  Even more, I don’t get why there are so many people who fall for what to me sounds like one of the best marketing gimmicks and, dare I say, scams.  To me it’s not any better than snake oil salesmen out west in the 1880’s or circus barkers in the 1930’s.

I signed up for his free emails just to see whether he was selling anything new and find that there’s a veritable unlimited supply of gullible and desperate investors.  For example, a recent letter entitled “The Market is Forming Its ‘Biggest Head and Shoulders Top Ever’: Prechter” includes the following chart:

According to the Prechter email:

“This shows the Dow Industrial Average going back to 1980. It has formed the biggest head and shoulders top that I think has ever existed in any stock market…we’re now heading downward from this formation.”  Since 2000, the stock market has been in a topping process. Eleven years may seem like a long time for a market to “top,” but consider how long the 1980s / ’90s bull market was. It takes time for that market optimism to dissipate.

I’ll say it takes a long time!  Almost two years ago, in a post entitled “S&P Index at 3000 by 2020“, I wrote:

“I don’t know how many of you saw all the exposure Bob Prechter of Elliott Wave fame been recently getting (he even made the Sunday NY Times Business Section front page). Prechter, true to form as a perma-bear, reinstated his call for the next leg of this Crash to resume predicting it will be on a par with the 1929-32 Big One with the Dow-30, currently at 10198, “likely to fall well below 1,000 over perhaps five or six years as a grand market cycle comes to an end.” But he’s been calling for a decline on that order of magnitude for what seems like years.”

Well, the Dow Jones closed today at 12462, or 22.2% higher than on July 13, 2010, when Prechter made the front page of the NY Times Business section.  Coincidentally, that NY Times piece appeared almost at the precise launch of the market’s last huge 27.9% run between August 31, 2010 and May 2, 2011.

Rather than joining Prechter’s bear camp then, I went the other direction with the view that we were (and still are) in a period very similar to the end of the last secular bear market in 1977-1982 … a view that’s more widely held and written about today than it was in 2010 when I seemed to be alone with that opinion.  My view then was and today still is:

“I’ve modeled a recovery from a similar low in the current Crash (March 2009) to where the S&P 500 Index might be in 2020 if it were to follow an identical path to the one it followed from 1975 when the Index last touched the lower boundary.  If the market were able to climb out of this secular bear market in a manner similar to the path out of the 1970’s one, then the S&P 500 Index could hit – are you sitting down – 3000 in 2020.”

and included the following chart:

Is Prechter correct in saying that the market is at the end of the topping process that began 10 years ago or is it the beginning of the march to 3000 by 2020?  If anything, Prechter [like Cramer] is often a very reliable contra-indicator.  The time he’s most bearish (if degrees to his perpetual bearishness is possible at all) is the time that the market on the very of a huge bullish move.

I you were smart, you wouldn’t have bought patent medicines or believed the acts in a carnival freakshow.  Let’s hope you don’t fall for this perma-bear sideshow and that Prechter’s new call for a market top turns about to be another contra-indication.

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April 12th, 2011

Chernobyl, Fukushima Dai-Ichi and the Market

I’m always on the lookout for things to write about and subscriber questions are always an interesting place to begin. For example, someone wrote this morning asking the following:

“Japan has now raised their reactor crisis to Level 7, the highest level and equal to the Chernobyl disaster. Is there any chart information from the Chernobyl disaster that might help us?”

At first I thought linking a nuclear reactor disaster to the US stock market was unusual but, after giving it some more thought, I realized that actually there was value in looking back to see how the market reacted then and comparing it to what might happen in reaction to the current one. Understanding similarities and differences between the two events at the disaster and the market levels could, after all, be quite meaningful.

The Chernobyl disaster occurred on 26 April 1986 at the Chernobyl Nuclear Power Plant in the Ukrainian SSR (now Ukraine). An explosion and fire released large quantities of radioactive contamination into the atmosphere spreading over much of Western Russia and Europe. It was considered the worst nuclear power plant accident in history, and it was the only one classified as a level 7 event on the International Nuclear Event Scale until the Fukushima I nuclear accidents of March 2011.

The battle to contain the contamination and avert a greater catastrophe ultimately involved over 500,000 workers and cost an estimated 18 billion rubles, crippling the Soviet economy……Estimates of the number of deaths potentially resulting from the accident vary enormously: the World Health Organization (WHO) suggest it could reach 4,000; a Greenpeace report puts this figure at 200,000 or more; a Russian publication, Chernobyl, concludes that 985,000 excess deaths occurred between 1986 and 2004 as a result of radioactive contamination. (from Wikipedia)

The market’s reaction at the time was as follows (click on image to enlarge):

It might first appear as though the disaster damaged the market by stalling attempts to move higher as the S&P 500 Index began trading in an 11% range between 229 and 254. If Chernobyl did have a direct relationship to the consolidation pattern during most 1986 then it pales by comparison, however, with the market’s own melt-down and the largest one-day percentage point loss on Black Monday in October 1987 a little over a year later:

Put in an even longer-term picture, Chernobyl appears as little more than a bump in the road of the longest bull market in history that began when the S&P 500 successfully first crossed above 125 (Dow Jones Industrial Average above 1000) in 1982 and ended with the bursting of the Tech Bubble in 2000:

It’s difficult making “if-all-things-are-considered-equal” sorts of comparisons because Russia in 1986 was different than Japan and the world economy and trade are today. I would say, however, that the market today is at about the same early phase in coming out of the current secular bear market that begab with the Tech Bubble Crash in 2000 as it was in 1983 coming out of 1966-1982 secular bear market. If, in fact, we are in the early phases of this recovery then, over the long-run, the Japanese nuclear disaster will also appear as a blip on future long-term charts.

Thanks for the question, Chuck.

January 7th, 2011

Investor Sentiment and Market Direction

One of the wonderful things about coming out of a bear market is that there always seems to be a lot of historical symmetry one can usually find.

I should first point out that contrarians, these days mostly economists who dare comment on the stock market’s outlook, seem to latch on to bullish investor sentiment as an indication that the market is overvalued and destined to decline. For example, two weeks ago Paul Lim wrote in the Sunday NY Times in an article entitled “Why Investor Optimism May Be a Red Flag“:

“…. investors are finally getting their risk appetites back. And it may also be an indication that people are becoming greedy after the easy money has already been made in the market…..some market strategists worry that investor optimism itself may be a headwind to another strong year for the market …. It just goes to show that by the time the market thoroughly convinces investors to be optimistic, most of the good news is already behind us.”

(Of course, the Times reversed themselves this week in a piece entitled “Can You Trust the Market?” where they repeated the statistic on the $80 billion investors withdrew from equity funds in 2010 with the following explanation: investors are leery of the market including two crashes in ten years, the “flash crash” and Republican efforts to stall further financial industry regulations.)

Does optimism lead to a decline or does optimism coincide with a strong market? Does pessimism lead to an advance or does pessimism coincide with a bear market? It’s truly a chicken/egg question. Rather than attributing a causal relationship between investor sentiment and the direction of the stock market, it is safe to say that they tend to move in tandem. When sentiment is optimistic the market advances and when sentiment is pessimistic the market declines.

Intuitively, though, the high bullish sentiment that contrarians fear seems to me to augur well for the market’s outlook. I didn’t have any evidence to support my belief until recently when the Bespoke Investment Group, the purveyor of a plethora of market statistics of all sorts, published a chart of investor sentiment over the past 10 years in a piece entitled “Bullish Sentiment: Down But Still Lofty”. Their statistic combines the level of bullish sentiment readings from the Investors Intelligence (II) and American Association of Individual Investors (AAII) surveys.

Rather than focusing on small changes in the level of this indicator, I compared the sentiment indicator against that S&P 500 over the same period and arrive at a decidedly different conclusion:

What struck me was the apparent symmetry in market sentiment between the early stage of the recovery out of the Tech Bubble Crash and the current bull market. The last time sentiment was this positive was from mid-2003 and the beginning of 2004. It wasn’t until the market began to consolidate did the sentiment indicator start become less optimistic. From the bottom of the Tech Crash in March 2003 to February 2004, sentiment fluctuated between 100 and 130.

The sentiment indicator hit 130 for the first time again this past August as the market began moving out of the 14-month trading range. If the previous recovery is any indication, the market could continue to rise and sentiment could continue to fluctuate at optimistic levels for several months before a correction sets in and the indicator begins to turn bearish.