The general negative feeling I am getting from the media which includes sites like this and of course TV and radio, is at a level we normally see at key lows. Even my local news at 6:00 is talking the economy down and that is very rare
The number of individual investors who have a bullish outlook on the stock market for the next six months plunged to 21%, from 30% last week, according to the American Association of Individual Investors. That compares to the low level seen when we made the low in March of 09. At that low I believe we marked it at 19%.
As mentioned, we are seeing extreme bearish sentiment from investors. In fact the majority of article writers and advisors are making dire predictions, as the headlines of the articles on this and other sites clearly show. Now look at which articles are getting the most reads. Yes that is right, the more horrific the title, the more views it gets. In other words the public is eating it up. Everyone likes to scare themselves with a good train wreck, so we have to factor that into the equation but I have been hard pressed to find any bullish views at all. A strong bull move has always followed these kinds of extremes.
However, there are a couple of things that make our current situation different.
What makes this different?
The Fed is still working the austerity angle, it's reserve banks traded their large equity holding in for government debt earlier in the spring, when everyone else was dumping debt and buying stocks.
Remember when Bill Gross was going to start a stock mutual fund and shorting bonds was the slam dunk play of the decade.
Then by stepping on the monetary brakes it was easy for them to mark up treasuries and now fund managers are forced to move back into them high, after selling out of them on the lows.
At previous low times when we hit 20% sentiment readings the fed banks were still loaded long stocks, having bought cheap from the same feckless fund managers that always seem to get it wrong. In other words they were highly motivated to keep stock prices up. Now they would like to see lower stock prices, so when the time comes, they can roll back out of bonds and into stocks at more sensible levels. Then the Fed will step on the gas again. You may want to read my article on the Fed's manipulation of the economy for their own benefit. (Dancing on quicksand)
Cyclical pattern is bearish
The second thing that I find intriguing is that this time the cyclical pattern favors the bears. It favors continued selling. Here's the thing, at previous times when the sentiment was at an extreme, the cyclical model was making a 4 month low and turning up! This time the model is in the Casandra's favor. Will they get it right for a change? Will the Fat Boys abort the cycle? Let's take a quick look.
What the cycles are saying
That chart below gives a cyclical overview of the rally and where we are now. The green arrows represent the dominant 4 month cycle. Notice that the low in July was lower than the low in February that is a sign of underlying weakness. It follows that the next low due in late October or early November will be lower then the one in July. As you can see the next low is due near November and we are 2 months along or half way. The red triangles are 1 month cycles and they are subservient to the bigger 4 month cycle. We are due to make another 1 month low right now and it will be lower than the one at the beginning of August. That is not a good sign for the bulls. It suggests that maybe the 4 month cycle has already rolled over. If it has, then the next low will be much lower than the one in July. It seems that cyclically, the majority has it right this time.
Warning!
We have just made a 1 month low and we should rally from it. The rally may be bigger than expected. There is a gap just above 110.00 and we may fill it.
If we are going to bounce this is the time. There is a brief cyclical window that could allow a quick bear squeeze to forces some heavy short covering. The strength of the coming up stage will be very telling.
There is also an inverted head and shoulders pattern on the above chart that suggest there may be support at this level. Everyone is talking about there being a H&S top but no one sees the possible bottom forming. With the right shoulder at a 20% sentiment reading!
We have conflicting signals
The price of stocks is too high for the Fat Boys liking, long term. That is bearish.
This time the public has the cyclical model in their favor with a falling trend and a 4 month low due in November and this cycle may have already rolled over. That is bearish.
On the other hand, this extreme bearishness and the selling that goes with it as the public and the funds bail out of stocks, gives the Fat Boys the other side of the trade.
At the same time there is a potential inverted head and shoulders pattern forming. That is bullish.
Bottom line
There is still time for the next 1 month cycle to generate a sharp rally back to the recent highs. The bias is too negative here and the bears are vulnerable.
That could change the translation of the 4 month cycle and confuse the heck out of everyone. The FBs thrive on confusion.
Struggling?
You can join the Fat Boys and trade profitably, but you can't do it using conventional technical analysis. Please go to my blog to find out why.
Remember, the markets are controlled by the Fat Boys. You are either with them or a victim.
