Throughout 2015 I felt the market was in a topping phase due to complacency along with massive, negative divergences on those key, monthly index charts. The market didn't fall much in 2015, but it refused to have sustainable upside action. In the end, the markets were down slightly for the year. It took all of 2015 for the market to finally stop its upward thrusts. That's normal since the bulls had been trained to buy any and all pullbacks. They were sure to be rewarded, but with the bears fighting harder it took a little over a year to finally get the market from consistently moving higher. Then came the first trading days of 2016, and the slaughter was on. A very violent move lower in just a few weeks. The Nasdaq was down nearly 20% off its highs with the S&P 500 down about 14%. Some indexes officially reached what the market calls bear-market territory, while other sectors only reached corrective status. That said, most stocks, it seemed, were in bear markets, with down well over 20 percent. Some well over 30 and even 40 percent.
However, the lower P/E and higher dividend stocks carried enough weighting in the S&P 500 and Dow to prevent those two indexes from falling into bear-market territory, and a few days back the market finally printed some daily, index-chart positive divergences. The CEO of JPMorgan Chase & Co. (JPM) even bought shares (I think asked to by the Fed). The gap up came, and we were off to the races. The move off the bottom did something different than at any time during the 2008 bear market. It has now printed three consecutive large gap-ups and go (which we took advantage of in our long Q position). It also did the last gap up today from very overbought 60-minute conditions. Extremely unusual if we're in a bearish environment. Once overbought, the gaps should stop. It didn't. So now that has to be taken into the equation as something you see in an environment that's turning more bullish.
Looking at sentiment, which is critical only at extremes, we spent nearly two years at extremes on the complacency side of the equation with the highest reading in the upper 40's, which eventually topped the market out. Anything over 30% is complacent, but we had at least 10 readings over 40%. The complacency was absolutely off the charts. As the market began to go sideways the bulls began to lose faith. Upside seemed difficult at best. The market was no longer rewarding the buy pullback story that had been the friend of the bull for so long. Slowly, but very gradually, the market began to see the fruits of this frustration with the bull-bear spread getting smaller and smaller as the weeks wore on. This week we woke up to a negative reading of -13.3%. That is extreme fear. It can be a reading from which a market can bottom permanently. Doesn't have to be, but definitely can be, so that has to be put into the equation.
Now, what the bears still have going for them is just about everything else from bank headaches globally to diminishing fundamentals both here and abroad. We have earnings on a major decline. Worst quarter in many, many years. The problems on the fundamental level seem to be worsening, not improving. Huge one for the bears. Will these plusses prevail? I think we'll get our answer in the weeks to come. We closed today extremely overbought. A pullback will occur soon, and then another rally right back up, which should form a negative divergence. Off of that eventual negative divergence we should get our answer. How this market sells off a 60-minute negative divergence, meaning how those oscillators respond to selling on the daily chart, will tell me if the correction is over or not. It's 50/50 to me. I can see us blasting out to new highs and I can see the reverse.
As it unfolds the oscillators will help us with the answer. Let them talk to us with an open mind. No preconceived notion of what should be. There are no should-be's in this insane Disneyland of a game. Oh, and you can add low rates as being in favor of the bulls. They aren't going up much if at all this year. They will stay very close to zero. A very interesting time is upon us. Let the story unfold in the coming weeks.
Jack
Jack Steiman is author of SwingTradeOnline.com, a live Trading Room of his swing trades and technical market analysis. Former columnist for TheStreet.com, Jack is renowned for calling major shifts in the market, including the bottom of the bear market in mid-2002, the market top in October 2007, the late 2008's market crash (when he was 100% in cash), and the market bottom in March 2009. A free 15-day trial to Jack’s Trading Room is available at www.SwingTradeOnline.com.
