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| Today's Commentary (Short Term Outlook) |
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Smart money getting
worried It was a rare down day for stocks yesterday as concerns over deficits hurting the global economic recovery shook the markets. The Dow dropped 53-points and it was only 2nd negative day in the last 12 trading days for the Dow. For the TSP funds the C-fund lost 0.55%, the S-fund dropped 0.72%, the I-fund fell 1.16% as the dollar rallied strongly, and bonds were also hit surprisingly hard as the F-fund lost 0.50%. The S&P 500 remains above all support levels, above the 20, 50, and 200-day EMAs, and in a 7-week ascending trading channel. From a technical standpoint, there is little to complain about except for some indicators that are on the extreme side of being overbought and seeing overly bullishness sentiment.  Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk The dollar rallied sharply yesterday, and this had a direct negative affect on stocks, particularly international stocks and commodities, as gold dropped about $19/oz on the day.  Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk Stocks have rallied sharply since early February, but can that rally continue as the dollar breaks out of the 7-week base it had formed? We are now seeing extreme readings bearish from the smart money. sentimenTrader.com's smart money confidence indicator is down to 29. Anything below 40 tends to be bearish for stocks. When that coincides with a dumb money confidence reading above 60, we have a sell signal.  Looking at a longer-term view of the indicator shows that the reading of 29 is the lowest since early 2007. But there is something worth noting in this chart. In late 2006 there was a period of low smart money readings (circled in red and marked "A") and the S&P 500 just continued to move higher for months. I remember that time well as, like today, I spent a lot of time on the sidelines waiting for a pullback. Apparently I did not learn from that experience.  Chart provided courtesy of www.sentimentrader.com In the past, when the dumb money indicator moved to the 60+ area, we have seen the market pullback at least temporarily, but during the last year we have seen the dumb money consistently in the 60+ area, and the smart / dumb money ratio over -0.25 (both circled in blue) but the market barely budged. Well, here we are again. The only difference today compared to the reading over the last year is that the smart money confidence reading hit a multi-year low. But as we have seen in the past, that doesn't mean the market is going to rollover any time soon. We will likely get small 5% type pullbacks here and there, but if the market is going to correct 10% or more, it will likely be accompanied by some major economic event. I am concerned with the news out of Europe and that could be the catalyst to a correction, but I am also concerned for the U.S.A. as our deficit hits nosebleed territory. Something will have to give and the news out of Greece and Portugal may be giving us a little foresight into what might be in our future. Thanks for reading. We'll see you back here tomorrow. Tom Crowley |