Is The Bullish Sentiment Now Too High?

The stock market generally does not like a surprise so when the non-farm payrolls showed an increase of 500,000 instead of the estimated 250,000 stocks dropped sharply in pre-market trading. The report spurred debate in the financial press on what the report means for future FOMC rate hikes. After breaking support two weeks ago yields were significantly higher last week, adding to the mixed signals.

In the coming week, the focus will be on the lastest CPI report that will be released on Wednesday. There are also several key earnings reports out again this week. It has been a surprisingly good earnings season despite the early low expectations. According to FactSet “87% of the companies in the S&P 500 have reported actual results for Q2 2022 to date. Of these companies, 75% have reported actual EPS above estimates … but below the five-year average of 77%’.

For the week the Nasdaq 100 Index was up 2% outpacing slightly the 1.9% gain in the iShares Russell 2000. The SPDR Gold Shares were up 0.7% for the second weekly gain in a year. The S&P 500 was up just 0.4% for the week after making a new rebound high.

The Dow Jones Utility Average lost 1% while the Dow Jones Industrial Average was down 0.1% as was the Transportation Average. On the NYSE there were slightly more declining than advancing issues last week.


So is the bullish sentiment too high now that the Invesco QQQ QQQ Trust (QQQ) has rallied 19.7% from the June low of $268.75?

That has been the argument of those who still believe that the rally from the June lows will ultimately fail. As reported by the Wall Street Journal, the June the ratio of bullish to bearish investment newsletter writers from Investor’s Intelligence hit a low of 0.60. Just two weeks ago the ratio turned bullish by moving above 1.00 and now stands at 1.37. That means that for every bearish financial newsletter writer there are 1.37 bullish ones. The ratio is still not at historically high levels.

This is just one group of investors but not all of the market participants seem to be as bullish.

The weekly chart of the S&P 500 shows that it has almost reached the late May high of 4177.51 as last week’s high was 4167.66. The 50% retracement resistance is at 4184.43 with the weekly downtrend, line a, in the 4300 area. The 20 week EMA at 4085.75 is trying to turn higher.

The most recent survey results from the American Association of Individual Investors (AAII) have the bullish % at 30.60% after dropping to a 30-year low of 15.8% on April 13th (point 1). If it were in the 45-55% area now, as it was during the 2008 bear market rally (see chart) I would feel that these investors were too bullish.

The AAII numbers have been a reliable contrary indicator as when the bullish % is in the 20% area I look for positive signs from the advance/decline line analysis to indicate that the market’s trend has turned positive. As for the Investors Intelligence numbers they are also interesting as a contrary indicator when they are at extreme levels like earlier this year.

The most recent data from the institutional investors and large money managers suggests they are not yet convinced that the market’s rally is sustainable. The NAAIM Exposure Index is not designed as a market timing tool but is one that I have commented on frequently in the past. It peaked in November and then formed a lower high as the S&P 500 was peaking. The Index has turned higher and just moved above 50% last week (point 3). It had a similar pattern after the Covid crash in March 2020, point 2.

Next week we are likely to get the latest BofA Survey as the results in July reflected “Full Investor Capitulation Amid Pessimism” according to Bloomberg. The survey of 259 managers, who have $722 billion under management, reported their “allocation to stocks plunged to levels last seen in October 2008”. These managers have been quite negative for several months but if they are changing their minds they might be buying the next dip.

The Invesco QQQ Trust (QQQ) exceeded the 38.2% Fibonacci retracement level at $322.54 last week with Thursday’s high of $324.72. The downtrend is a bit higher at $326 with the 50% resistance level at $339.

By late June the Nasdaq 100 Advance/Decline line was in a clear uptrend, line c, and pullbacks to the rising WMA have provided good entry points. The move above the downtrend from the December 2021 and March 2022 high, line b, was a very positive sign for the market.

The A/D line could pull back to its strongly rising WMA and the July high without changing the positive outlook. I drop below the late July low and the support would seriously weaken the uptrend and would change the scenario for the next move higher.

At the current market levels and after Friday’s action I would not be chasing prices. I would not be surprised to see a 1 -2% pullback that should provide a good buying opportunity in several markets. As always take a close look at the risk of any new positions. I will be sharing my market outlook on Twitter leading into the CPI report.

Comments are closed.