The Signal from Sentiment
8/25/2014 7:07:20 AM
Good morning Traders,
With the market trading at historic highs, you might think the stock market is at a top. And you may be right - but before we go into our view of the markets, we need to take a look at our research.
Since the year 2000, we've been building a data base of indicators and using them to time the stock, gold, oil and other markets and advising our clients.
Our first chart shows the Investor's Intelligence and American Association of Individual Investor bulls minus bear data. You'll note that the AAII data is much more sensitive than the II Data. So in the short term, this is bearish - and much of the rally may be done.
Our second indicator is actually a model that we publish at the beginning of every year. This indicator suggested a rally up into July 16th. Now it's forecasting a consolidation and a turn lower. The issue was at the July peak, so many traders positioned for a downside move, that actually forces the market higher. Markets correct when people least expect it - not when people are prepared for it...
We have all the popular indicators on the NYSE and the Nasdaq - but we also advise you in what they mean. I started this research when I wrote a candlestick stock trading service to better identify when to trade certain candle signals. It has morphed into 4 databases of data that allows me to verify the correlation and accuracy of certain data series.
So where are we now? If the markets were to turn lower this week, that would set up some bearish divergences that would trigger more selling. So stay tuned.
We also follow several cycles, which periodically give us critical signals. Note that we have a 20 week cycle low coming in on 10/1, which also aligns with a seasonal low in the market. The potential of this coming in is even higher with the lack of a significant 9 month cycle low.
We also advise on the gold market (and oil and Natural Gas). We've taken what we've learned from timing stock markets through the view of price action and options activity and applied them to 3 commodity markets. Why? Because periodically these markets can have HUGE moves. For example, our recent OIL puts are up over 400% (which I'll talk about more below)! For Gold, we see a move setting up and are starting to position for it.
And finally, a quick view of the oil market seasonality. When I first looked at the seasonality figure, I thought it was counter intuitive. But we've seen this pattern repeat this year with a move up towards July and a turn lower. Will it continue lower? Will it bounce? Those are the questions we not only answer, but if we see enough meat in the trade, we'll position for it as well.
That's it for this morning's/weekend update. When we get a signal that the market is ready to turn lower, we'll start positioning for it by 1) issuing covered call recs; 2) Issuing our top PUT option plays and 3) Positioning short the QQQ. I expect the turn to take place in the next two weeks with key dates to look at as 8/28 and 9/5.
On our gold, oil and nat gas services, we're positioned in each awaiting for those markets to present reversals.