Bullish sentiment has been at or near record levels, levels seen at tops, not kickoffs to higher highs. This is of course a very bearish signal. Since the pop up Monday, bullish sentiment has fallen fairly significantly. Take a look at these two charts, the first showing sentiment levels at recent highs/lows (courtesy Michael Panzer), and the second showing the change this week (courtesy TPC):
Similar signals come from breadth (where advance/decline and up/down volume is falling, a bearish sign), complacency (where the VIX is at a level not seen since May 2008, just as the Big One began down), and optimism (where the put/call ratio is at its lowest level in four years). Last night’s STU had a take on this:
Unless there is a dramatic shift in breadth, volume and sentiment, the market appears on course to reverse this week’s rally, which appears extremely stretched. …
It appears clear that few investors expect a significant market decline from near current levels. These measures do not necessarily guarantee a selloff, but when viewed within the context of a fully developed wave structure for Primary 2 (circle), they certainly increase the odds for just such an outcome.
The STU wave structure is looking more like an ending diagonal – see their chart from my Monday post. Since then we had a sharp wave 4 down (intraday this week), and it looks It looks like we are in the final wave 5 up. It needs to get back to the upper trendline, and maybe have a bit of a throw-over, getting us to the Dow10700 level. As to timing, Tony Caldero has a good take on next week:
Next Friday is Options expiration. Typically, a rising market makes a high early in the week, pulls back some, and then Options expiration takes over into the friday close. Monday/Tuesday could be quite interesting.
What are the implications of this week’s downtick in bullish sentiment? It could reverse in a hurry Monday if we have another gap up at the open. More likely it indicates a short-term reversal ahead but not yet the end of the Hope Rally. I still hold to Feb for the peak as most likely, within a view of a peak in Q1. We might get the reversal next week, but still within the ending diagonal (ED) trendlines (ie above Dow 10420). If so, we would have rolled into the alt count of the STU: that Monday’s pop and the intraday low this week were not legs 3 and 4 but merely subdivisions of leg 2 of the ED, meaning legs 3 and 4 haven’t come yet.