Skip to main content

The Market Is Too Emotional

Are the signs pointing to a correction?

The Market

Another day with a grind higher. I am sure there will be all sorts of statistics out tomorrow about Nasdaq being up 10 days in a row.

I realize there is quite a grind and no volatility taking place, but the market has become highly emotional. I have noted the sentiment readings so often in the last week that I probably shouldn't list them again. But I will!

The American Association of Individual Investors has bears at 17%, the lowest level since early November. That was as of last week. In early November we rallied for another three weeks. The Investors Intelligence readings, which I have discussed constantly, showed four times as many bulls as bears last week. The bulls were at 56%. The results of this week's survey will be out tomorrow morning. Keep in mind that if the bulls go over 60%, that has been the signal that we're close to a correction because every time in the last 25+ years a reading over 60% bulls has led to at least a 3% correction.

Let me note that the moving-average lines of the put/call ratios are still heading down (bullish) so there is no issue there. But the ISE Equity ratio tumbled under 100% today. Last week it was over 200%. In fact, it was over 200% two out of the last three trading days. Since its inception, we have never seen it go from a reading over 200% to a reading under 100% in one day. Never.

The closest I can come up with is twice it did so within two days. The curious part is both times it was in a highly volatile and declining market environment. It might not be a similar environment, but the emotions are surely similar.

For the sake of reference, the two times were mid-August 2010 and late September 2011. In 2010, the S&P 500 had had a very rocky summer starting with the flash crash in May of that year. We had recovered somewhat by early August and then we fell again, about 4% in a few days. That's when we got those wild swings in the ratio. We rallied 2% and then plunged 5% over the next week or so. Then Ben Bernanke gave his infamous Jackson Hole speech laying out the parameters for QE2, and the market bottomed.

The other time, in late September 2011, you might recall the market had been in a tailspin since early August when the U.S. was downgraded by S&P. In late August, we had rallied then begun going down again. After these readings, we plunged another 10% in four days, but found a terrific bottom in early October.

Obviously, this current market situation is vastly different than either of those. However, considering we are overbought and the sentiment readings are so elevated, it still makes sense that we should have a pullback. But I still think we would rally again after a pullback.

New Ideas

I can't recall what price SPDR Gold Shares (GLD) was when we last checked, but we had this line drawn in. Today it bounced off the line. I must admit I don't love GLD down here but I do think it has a good chance of rallying from this level. I would consider myself wrong if it traded under $114. It's too soon to know where it can rally to, so if it does rally from here and anyone wants a follow-up, just email me and I will follow it up.

Image placeholder title

Today's Indicator

The McClellan Summation Index is still rising.

Image placeholder title

Q&A

Helene welcomes your questions about Top Stocks and her charting strategy and techniques. Please send an email directly to Helene with your questions. However, please remember that TheStreet.com Top Stocks is not intended to provide personalized investment advice. Email Helene here.

Nike (NKE) is trying to finish the correction it has been in since November. I prefer the Under Armour (UA) that we looked at last week, but I would not dismiss Nike as a bad chart. Similar to the IBM (IBM) chart we looked at last week, it is right at a resistance line. So either it pushes over it and comes back to retest it or it pulls back, and as long as it stays over $94 it ought to make another try at getting over that line. So either you can buy a dip now or you can let it break out and then buy the dip back at the line (essentially near this same price). Under $94 does not make it a bad chart, just not as good.

Image placeholder title

When we looked at Apple (AAPL) just after its earnings, we had a first target in the $126 area. There is a secondary target around $134, so it essentially is in the area. Longer term, I can calculate a target around $145. Since it has a next target around $134, I would not be in favor of buying it now but rather would wait for either a corrective move or a sideways digestion.

Image placeholder title

I have a hard time with stocks like Jazz Pharmaceuticals (JAZZ) when this downtrend line crossing comes at the highs. But we can't dismiss it, especially in a market that doesn't seem to want to go down despite the overbought-ness and sentiment. As long as it can stay over $173, it should work its way higher, albeit with resistance all the way up to the old highs.

Image placeholder title
Dow is the Most Vulnerable to Profit Taking

Dow is the Most Vulnerable to Profit Taking

Despite the newfound focus on the Dow Jones Industrial Average last week, it turns out we may be seeing the last gasp of outperformance here.

How Hungry Is This Market?

How Hungry Is This Market?

Here's what I'd like to see happen with this rally -- I'd like it to show some FAANGs. Here's why -- and a look at Microsoft's chart, news highs and more.

Sloppy With a Chance of Rallying

Sloppy With a Chance of Rallying

Here's why I see another rally before the weekend, even amid the messiness, and a bump for Amazon.

Sloppy With a Chance of Rallying

We Can Rally Just a Bit More

Energy stocks have a lot of complacency in them.