No surprise: market sentiment is all over the place. The traders that were not sidelined awaiting Fed policy and Brexit vote news have taken sides – and there is a vast divergence of opinion about market direction and sentiment.
The bulls have dug in their heels looking for more upside and new all time highs, while the bears have started saying “not so fast” with a weakening economy and softened leadership. Is there potential for exciting market action? Or, will the market not move at all? The latter option may be the best bet.
Let’s take a look at both positions.
What the bulls are saying – and why
The bullish argument is supported by some very solid trends and statistics:
- The price chart has turned bullish, and frankly, that carries serious weight in our analysis.
- Breadth figures have been quite impressive and helped turn the trend higher.
- Volatility spiked last week before moving lower. It has been trending down since then, which is a positive for the bulls, but the VIX is sitting near 20, and that is not an all clear signal. A move below 17 would be a good start.
- Put/call ratios had been elevated recently, but they have also started to decline sharply. A spike in this ratio followed by a turn lower is a strong bullish indicator, especially if the ratio spikes above 1.
- Bond yields have dropped to levels where we often see money flowing from fixed income into equities. This has helped keep a strong bid under the markets.
- This week brings the end of the second quarter, the beginning of a new month and a three day weekend to boot. Expect volatility to come tumbling down – often good for the bull case.
What the bears are saying – and why
The bears have several things working in their favor, too:
- While the price action has been constructive, the markets have been rangebound for a few months. The 2100 level on the SPX 500 has been a huge challenge on four occasions; markets have have risen up and been rejected each time.
- Sentiment polls have been leaning bearish, but there has been a huge buildup of those in the neutral camp or waiting for a correction.
- All markets are under distribution, with no better than a C- rating (according to investors.com).
- The top sectors are not in growth industries.
- Distribution days have been building up while the market uptrend is under pressure.
- The McClellan oscillator is sitting in a mid-range. It’s not indicating any direction whatsoever after stalling at higher levels; it seems headed down.
- The bullish percent index is pointing down once again after moving sharply higher earlier in the month.
- The amount of stocks on a buy signal from a point/figure analysis is moving lower.
- Economically speaking, the US is in poor shape, and the most recent jobs report reflects it. The June report comes out on July 8, and I highly doubt that we’ll see much enthusiasm before that number is released.
Without much direction and mixed market sentiment, it pays to wait and see how the market responds to events and the calendar. Sometimes the sidelines are a good spot to be in!
Copyright: elvinstar / 123RF Stock Photo
