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Banking on a Change in Sentiment

As I’ve said, we have to enjoy the rally until sentiment shifts – and we saw some subtle changes in that Monday -- and the major banks have changed their views.

The Market

Many have asked me how will we turn sentiment from bearish to bullish when earnings are expected to be so poor. I would say the market has rallied just fine with earnings expected to be so poor.

But if you need any proof that the sentiment will shift, look no further than Goldman Sachs (GS) - Get Free Report, JPMorgan (JPM) - Get Free Report and Morgan Stanley (MS) - Get Free Report who saw their strategists up their targets for the S&P and pretty much say the low is in, there will be no retest.

I have explained before how this usually works. We have to enjoy the rally until sentiment shifts. We saw some subtle shifts in that Monday, as the major banks have changed their view. We saw a more subtle shift Monday as the put/call ratio ended the day at 92%. That is still high, but it is the lowest reading since March 24, so that’s a subtle change.

The ISE Call/Put ratio zoomed up (think of it as the inverse of the put/call ratio, so a high reading means too many bulls). The reading of 151% is the highest since Nov. 15. Now the 10-day moving average is still not that high for the ISE, but as you can see it has finally started lifting off the lows. When you replace low readings with high readings that happens.

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Generally speaking I would say Monday was the sort of day we should get when we are a little bit short-term overbought, but not yet overbought on an intermediate-term basis. Remember it takes time for the recent bears to turn back to bulls. If we don’t collapse on Tuesday, we should see the American Association of Individual Investors’ weekly survey with a downtick in bears, which should see a commensurate decline in the four week moving average.

Recall how long it took the sentiment indicators to get to “too much bearishness,” you cannot expect them to return to too many bulls that quickly.

New Ideas

I have been waiting for weeks now for Amazon (AMZN:Nasdaq) to give us a fill on that gap at 2,100. It did more than that Monday. It is back to the old highs and has done nothing wrong. I would take some profits, only because the stock is now back at the highs. I still have a longer-term target around $2,250 to $2,300, but the best thing it can do now is flag from here.

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A word about GLD (GLD) - Get Free Report (again). It did break out Monday and the Daily Sentiment Indicator (DSI) came back to $89. If it is up again Tuesday, it is very likely the DSI will get over 90 and then we’d expect a pullback again.

Today’s Indicator

The 30-day moving average of the advance/decline line is not yet overbought. It’s tough to pinpoint exactly when this might occur, but it seems like we’d dip a toe into overbought territory in late April.

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Q&A/Reader’s Feedback

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Micron (MU) - Get Free Report has resistance in that $50-$52 area and I would expect that’s where it stalls out should it rally again (it should rally again).

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I keep staring at the charts of the various defense contractors and wondering if their budgets get cut since it doesn’t seem anyone is particularly focused on war or conflict these days. That having been said, Lockheed Martin (LMT) - Get Free Report is plenty of resistance in the $380-$400 zone, so if it rallies there I’d sell it.

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I think the resistance on Home Depot (HD) - Get Free Report turns it back. If I am wrong, then $220-$230 would be much more serious resistance. I might take a look at HD should it fall back into that $180 zone. I might be a buyer back there.

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