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November 28, 2005
Investor sentiment, advisor sentiment and Dow overbought.
Market Musings
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Good Day! Investors are getting quite bullish and this most likely will translate into a correction or consolidation. The latest readings from Lowrisk.com registered 0% bears. Yes, you read right. Of those surveyed, 79% were bullish, 0% were bearish and 21% were neutral.
This chart shows bulls less bears over the last two years. As you can see, Net Bulls (bulls less bears) moved to its highest level in over two years. In fact, this is the highest level since July 2000 when the Dow was challenging 11000.
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A different picture emerges when I look at the sentiment readings from Investor’s Intelligence (courtesy the VTOReport.com). Net Bulls is only around 30% and well below the prior highs (Net Bulls equals bullish advisors less bearish advisors). The current reading is also well below that seen last December, which marked a real extreme. For bullish sentiment to reach an extreme, Net Bulls would have to move above 40% and this leaves room for further strength.
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Even though sentiment is getting frothy, recent breakouts in the major indices are bullish until proven otherwise. The Dow broke triangle resistance with a big move above 10700. Broken resistance turns into support and I would not question this breakout as long as 10600 holds.
The Dow may be strong, but it is also short-term overbought and ripe for a pullback. Notice that RSI moved above 70 for the first time since November 2004, exactly 52 weeks ago. However, this overbought reading did not mark the peak as the Dow forged two more higher highs (green carets). The Dow shows a lot of strength and this strength is unlikely to dissipate overnight. For now, I am watching the breakout at 10600 and a pullback into the 10700-10600 would allow a chance to partake in the uptrend with a better risk-reward ratio.
Posted by Arthur B. Hill at November 28, 2005 01:20 PM