Bullish sentiment as measured by Investors Intelligence is at 30-year highs.

Investors Intelligence surveys investment professionals and newsletter editors rather than the retail traders surveyed by the American Association of Individual Investors or AAII.

The II sentiment for last week rose to 63.1% and a 30-year high with 55 normally considered a strong sell signal. I have written over the last several weeks about the overbought markets and this is one more confirmation signal that sentiment is at extremes.

Technical indications in the equity market are also showing extreme complacency. The Volatility Index at 10.96 remains only 48 cents above the multiyear low at 10.58 that was set on January 28th. The prior multiyear low was 10.32 in July of 2014. Before that low, you have to go back to February 2007 at 10.18 for a lower low. This represents a market where the vast majority of traders are in full bullish mode.


The sentiment indicators for the S&P are also at multiyear levels. The Bullish Percent Index for the S&P shows that 79.2% of the S&P stocks have a buy signal on a Point and Figure chart. This is the highest level since July 2014.


The percentage of S&P stocks over their 200-day average has risen to 81.6% and just below the multiyear high of 82.4%. That means 408 of the S&P 500 stocks are above their long-term average.


Because of the flat market in January and the six days of minimal gains before President Trump's speech, the percentage of stocks over their 50-day average has failed to keep pace and topped out at 76%. The averages caught up with the stock when the stocks quit rising. This is still an overbought level.


The cumulative advance/decline line on the S&P has begun to weaken. It is near its recent highs and this may only be noise but we should keep watch. Note the MACD is rolling over and about to turn into a sell signal.


The Nasdaq advance/decline line has peaked and the MACD has already suggested a sell signal. The Nasdaq was very overbought two weeks ago and those pressures are now easing.


The small cap advance/decline line peaked back in early December and has remained choppy as the excesses from the 21% post election gain in the Russell are consolidated. The MACD is negative and a move in the A/D below 2,250 would be a strong sell signal.


The McClellan Oscillator for the NYSE has already shifted into sell mode as the small caps on the NYSE failed to keep pace with the Dow 30 big caps. This is a skybox view of the market and is useful for confirmation rather than an actual trade trigger. The move under 20 is confirmation of a sell signal.


The S&P weakness on Friday is a concern but it is not yet a sign of a pending decline. The index did not lose any ground ahead of the weekend and there were buyers on the dip. A move below Friday's low of 2,375 would be a warning but there is decent support at 2,360. A drop below 2,350 should retest 2,300 and a normal 3% decline.


The Dow remains the most overbought index now that the Nasdaq has consolidated some of its gains. The Dow has the most to lose after its 12 consecutive days of record closes and then the 300-point short squeeze on Wednesday. We could easily see a 500-point decline but that would not even dent the long-term uptrend. It would take a drop back to 20,000 to seriously damage the bullish sentiment.


Remember, we average about three declines of 3% or more per year. We have not had one since last fall and there is a lot of uncaptured profits at risk. With the Fed expected to hike rates on the 15th and the return of the debt ceiling crisis, there is significant market risk over the next two weeks. We should begin to see debt ceiling headlines every day starting this week. The talking heads on TV will be looking for something to use as a headline and the debt ceiling is always bad news. This will be a major challenge for the new president and the country will be watching to see how he handle it even though it will be up to congress to actually do something about it.

Remember, in August 2011 the S&P fell 250 points in about two weeks on a debt ceiling fight. Do you think the opposing parties in congress are more agreeable this time around? I seriously doubt it. This could get ugly.

Enter passively and exit aggressively!

Jim Brown

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