Have Bullish Sentiment Extremes Caught Up with Stocks?

Have Bullish Sentiment Extremes Caught Up with Stocks?

Memo to equity bulls: 2014 is not 2013. And thus far, it’s been a bumpy road for stocks.

The  S&P 500 (NYSEARCA:SPY) broke below 1,800 for the first time this year. Have bullish sentiment extremes finally caught up with the stock market?

AUDIO: Listen to Ron DeLegge @ The Index Investing Show

Via our Technical Forecast issued on Jan. 5, we alerted readers:

“We always adhere to price first and foremost in our trading and until price proves to us the market’s trend has changed, we will not assume it has. 1,821 is the first S&P 500 (^GSPC) price level that will show us a trend change. Previous resistance now turned support at 1,815 is the next support level. Then comes the all important intermediate term trendline that has been in place since 2012, now up to the XXXX (for subscribers) level. If these levels fail as support, then it will be more likely the market is rolling over in a major market top, helping to identify the next likely 20%+ pullback.”

Pull Call Ratio

Among the various indicators that flashed an early warning sign, were extremes in the put/call ratio. Shown above is a put/call ratio chart that appeared three weeks ago in our Technical Forecast to readers. We said, “Whenever options buyers purchased an inordinate amount of calls, driving this ratio down to below .80, it often marked a market top.”

The ETF Profit Strategy Newsletter outlines key support/resistance levels in the S&P 500 along with ETFs linked to other major asset classes like gold (NYSEARCA:GLD), bonds (NYSEARCA:TLT), and real estate (NYSEARCA:VNQ). In 2013, 70% of our weekly ETF picks were winners.

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5 comments on “Have Bullish Sentiment Extremes Caught Up with Stocks?
  1. DavidinTokyo says:

    Ron and Chad
    Some great analysis; two questions.

    1. How long do your target price points need to be in place to make decisions? e.g. close for one day and thats the trigger or close and remain below/above for two days etc.

    2. re Chad`s gold commentary in the newsletter
    A market pull back like this would not in my view mean the Fed will reneg on taper. Presuming the taper continues this next meeting, this will be good for USD so bad for gold and take down GDX with it, yes?

    Many thanks

  2. Chad Karnes says:

    For #1 that is really a money management question and depends on what type of trader/investor you are. For better or worse, this is more a question about yourself than it is a set rule. You know yourself the best, so choose an entry/exit strategy that keeps you comfortable and is representative of your time horizons.

    If you are long term, it generally is better to wait for more confirmation as the long term horizons affords you the ability to wait longer for entires/exits. If you are shorter term, then it may make sense to wait for any breach of prices, etc. A good example of this is the current Euro setup discussed in the TF. More aggressive traders likely just wait for any close whereas longer term investors likely should wait for confirmation before entrance/exit.

    All in all whichever way you choose, over time they should equal out to similar results as the primary factor is ultimately whether you are on the right side of the trade or the wrong side, not necessarily your exact entrance/exit. Waiting for confirmation will prevent more whipsaws and quick exits, but also at the expense of missing out on some returns. I wish I could be of more help, but really just pick whichever you feel most comfortable with and fits your style.

    For #2 see this weekend’s TF, but my initial opinion would be there are a lot more factors driving gold and GDX’s price than just taper/no taper, so ultimately we let price be the deciding factor. As an example I point to the dollar which has actually seen strength over the last four years during QE and gold which has lost much more ground than the dollar has gained, even in the face of unprecedented monetary policies worldwide the last two years.

  3. David Marriott says:

    btw Chad, what is the smart money doing re gold?

  4. JOHN says:

    DOWJONES made the TOP on 11-OCT-07 and NASDAQ made the TOP on 31-OCT-07,
    So the difference is of 15 days.

    Now in the current scenario, DOWJONES made the high on 31-Dec-13 and NASDAQ made the high on 22-Jan-2014.

    Again a difference of exactly 15 days.

    Again similar to what happened in 2007 in no. of days difference between TOP of DOWJONES and NASDAQ

    SO will the history repeat again???…

    Your Views Please ….

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