A Quick Overview
Below we briefly review updates of two charts we have employed in our recent market updates. The first one is a quick glance at several major indexes: the NDX, the SPX, the Russell 2000 and the DJIA. There have been multiple divergences between these indexes at their recent peaks, but there is also a divergence visible now that a rebound has begun – which is a direct result of the recent underperformance of momentum stocks. Note that we have taken this chart snapshot during the trading day, so it doesn’t incorporate Wednesday’s close yet.
The market has begun to bounce from a natural support level: lateral support in the NDX (as well as the Nasdaq Composite and the RUT) that has served as a support and resistance level on several previous occasions.
As you will see further below, although momentum and growth names are outperforming ‘safe’ stocks in Wednesday’s trading, the trend toward safety is not undermined yet by this short term counter-trend move. There have been several short term pullbacks in the XLU-QQQ ratio since this new trend emerged in November, but the trend has continued all the same. On Tuesday, the ratio actually reached a new high for the move and is probably overdue for a pullback.
The Rydex sentiment measures we are keeping an eye on show practically no change since our last update. The only measure that is not firmly in cloud-cuckoo land just yet are total assets in bull and sector funds. However, relative to assets in money market funds and bear funds, they are near the peak levels recorded in early 2000. Bear fund assets and money market fund assets are at 17 year lows.
In short, while bulls appear not as strongly convinced yet as they were at previous major peaks, bears seem thoroughly dejected at the moment. Market participants who are merely cautious and are keeping some powder dry in the form of cash have become a distinct minority. So there is very little betting on the market’s downside potential, and cash is widely regarded as trash. Regardless of the market’s near term moves, these continue to be major warning signs. The Rydex fund family only represents a tiny slice of overall market activity, but we have found time and again that it reflects overall sentiment and positioning quite accurately. It definitely serves as a useful microcosm of general market sentiment.
