Thursday, September 5, 2013

The shifting tides of investor sentiment

The overall sentiment among investors has shifted from complacency to worry in the last few days, an emotion that was conspicuously lacking in recent weeks as the market drifted sideways-to-lower from mid-July through late August.  For instance, the CNNMoney Fear & Greed Index has fallen to a multi-week low of just 22% (out of a possible 100%), a reading which indicates a high level of fear among market participants. 

Also worth mentioning is the Arms index (also known as TRIN, or Short-Term Trading Index), which is a measure of market breadth.  The Arms index (named after its developer Richard Arms) tends to spike higher at or near short-term market bottoms and lower when the market is “overbought.”  On Tuesday the Arms index had one of its highest readings of the year at 2.65 (below). 

I don’t think we’ve arrived at an interim bottom yet, but given the increasing levels of fear on Wall Street we should be getting close to one.  The S&P 500 Index (SPX) found temporary support on Tuesday and Wednesday at its 120-day moving average (see chart below).  We’ve discussed the technical importance of this particular moving average in recent reports and you’ll notice that the previous correction low was stopped at the 120-day MA intersection back in late June.  As mentioned earlier in tonight’s report, it was on the very day the SPX touched the 120-day MA on June 24 that the up/down volume ratio was very similar to what it was on Tuesday of this week.  It’s still too early to tell with any certainty whether the SPX will establish interim support above this important trend line, however.  It should be good for at least a temporary support for the next couple of days, however, or until the short-term cycle bottoms as we’ll discuss below.  [Excerpted from the Aug. 28 issue of Momentum Strategies Report]