What's Going On With the Fat Lady?

By: Matt Hilliard | Thu, Dec 22, 2005
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I cannot recall how many times in the last two months I have heard that this bull market is getting old. During October CNBC paraded guests from all over Wall Street to tell us that statistically we are past prime for a bull market. While that may be true, I suspect that as usual they were feeding the public an easy line to bite. And of course the market rallied 10 percent straight up from there. QQQQ Dec. puts were catapulted to among the highest open interest on the board, I'm guessing a lot of that wasn't hedging. By October, the historical down month, sentiment had deteriorated to full bearishness. With energy prices exploding, and personal savings so low, its no wonder people feared the worst. When the technicals deteriorated, traders must have perceived it as a trade of a lifetime. I was curious, though as to why sentiment deteriorated so rapidly. Though October's sell off wasn't pretty, the indices held up well and never really penetrated major support.

But one look at the AdvanceDecline line tells of the pain of most buy and hold investors.

Chart courtesy of Prophet.net

While the major indices made three higher highs, stocks in general appear to have flailed around. This 2 year negative divergence supports the bearish argument. But the only difference between a positive divergence and a negative one are which side you choose to call the divergence. The lower pane shows the new highslows ratio, you can see that as the index topped out and sentiment ran to the extreme, new highs flared up dramatically. Incidentally, less new highs have been hit as the index powered on. Ted Warren said "There is no better proof that a stock will go up, when it acts as if it can't."

Currently, AAII sentiment has slumped to lows not seen since October, albeit not nearly as bad. Bears are at an eight week high. Only time will tell where that leads us, but I suspect it will be higher. In judo, one attempts to get an opponent's momentum in one direction, only to use it against him in another direction. And the Wall Street machine makes plenty of money.


Author: Matt Hilliard

Matt Hilliard

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