AMONG THE CASUALTIES OF THE MARKET: SENTIMENT
There are times sentiment studies can be the most valuable tool one can have in their arsenal. There are also times to dump it in a toilet filled with old cigarette butts and clipped toenails. What separates the professional from the amateur is knowing when to use what. There are times to pull out your AK-47 during a battle and there are other times when it is better to use a hunting knife. WHEN matters.
I haven't talked about sentiment for awhile because it is useless in a market that is caught in the mid-range of its bullish life cycle. It only becomes useful at extremes of one sort or another. Those extremes may involve highly oversold conditions, based on panic driven selling. Highly overbought conditions, based on pure greed. A break of an important generational trajectory point. A break of round number or important support level.
We are now entering a moment in time when I am watching sentiment again. I'll tell you why: Something curious is happening during this recent selling that I just started paying attention to today. There seems to be a general lack of fear that has developed. While the Russell 2000, as one example, is sitting at one month lows, a short-term measure of the put/call ratio I track is sitting at near 3 month lows (see chart below).
I am starting to pay attention now because of the following bearish technical events that have taken place over the past several trading days:
1. Dow failed the important generational trajectory for a third time on Friday. Death comes in 3s and 4s for bull markets. I said in the weekend review to "remain vigilant."
2. The Russell broke down and away from its generational trajectory as of the close today.
3. The VIX experienced a powerful breakout above its trajectory off the 2008 highs today.
In the meantime, the chart below shows sentiment is actually becoming more bullish as these important trajectory points are broken:
click chart to enlarge
Put/Call Ratio 2/5 Moving Average Only
