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Amateur Investors Mid Week Market Analysis

So far the Dow and S&P 500 have held support near their 20 Day Exponential Moving Averages (EMA) while the Nasdaq has dropped just below its 20 Day EMA. Meanwhile the much anticipated decision on interest rate cuts by the Federal Reserve will be announced on Wednesday so it will be interesting to see how the market reacts to that decision.

As mentioned above the Dow so far has held support near its 20 Day EMA (blue line) and Neckline associated with its previous Inverted Head and Shoulders pattern just above 9000. If the Dow breaks below 9000 the next areas of support would be either at its 23.6% Retracement Level near 8880 (point A) which is calculated from the October 2002 low to the June high or at its 50 Day EMA (green line) which is now nearing 8800. To the upside expect resistance near the mid June high just above 9350.



The Nasdaq has broken just below its 20 Day EMA (blue line) and if it continues downward look for the next area of support in the 1550-1575 range. The 1575 area is along the Nasdaq's upward sloping trend line originating from the March low while the 1550 area is near its 50 Day EMA (green line) and 23.6% Retracement Level calculated from the October 2002 low to the June high. Meanwhile to the upside expect resistance near the 1680 area as this is where the Nasdaq has stalled out twice during the month of June.



The S&P 500 so far has held support at its 20 Day EMA (blue line) near 980. If the S&P 500 drops below its 20 Day EMA the next area of support is around 960 which is at its Neckline in association with its previous Inverted Head and Shoulders pattern. In addition the 23.6% Retracement Level calculated from the October 2002 low to the June high is also near 960 as well. To the upside look for resistance at the June high near 1015.



Tonight I thought I would review some market history along with the Bullish-Bearish Indicator. A lot has been made concerning the amount of Bullishness or Bearishness in the market based on the Investor's Intelligence readings which survey the people who write Investment Newsletters. As of today I'm not one of those lucky people. At any rate Investor's Intelligence has been polling Investment Newsletters since 1963 and reporting the % of Bullish or Bearish Investment Advisors since then.

I have made a chart of what the % difference (Bulls-Bears) between the Bullish and Bearish Investment Advisors looked like from 1970-1979 and compared it to a plot of the S&P 500. From what I can see generally when the Bullish Investment Advisors has been very negative (large negative readings) about the future of the market the S&P 500 has made a bottom and then rallied strongly. Some examples include 1970 into 1971 when the % difference was near -30 (point B) and the S&P 500 then rallied nearly 42% from the Summer of 1970 until the Spring of 1971 (points C to D) before going through a correction phase.

Another example occurred in the mid 1970's when once again the % difference between the Bulls and Bears was around -40 (point E) and the S&P 500 made a bottom and then rallied 50% from the Fall of 1974 until the Summer of 1975 (points F to G) before going through a correction phase. Meanwhile another time of extreme pessimism about the future of the market occurred in the early part of 1978 when the % difference (Bulls-Bears) reached -40 (point H) and the S&P 500 made a bottom which was followed by a 20% rally from March of 1978 until August of 1978 (points I to J) before the S&P 500 went through a correction phase.



Next I will analyze what has happened when there has been a lot of optimism about the future of the market when the % difference between the Bulls and Bears has been very high (generally a value above 40 as denoted by the solid black line). As you can see there were quite a few occasions during the 1970's when the % difference difference between the Bulls and Bears exceeded +40 especially from 1971 into 1972 and again from 1976 into 1977. What stands out is that sometimes a large % difference between the Bulls and Bears ( > 40) led to a long sustained sell off and other times it was much less severe and only served as a minor correction before the S&P 500 trended higher.

Let's look at a few examples. In the first case notice how the S&P 500 made a top in the Spring of 1971 (K) after rising 42% from the bottom made in the Summer of 1970 (point L). The % difference between the Bulls and Bears rose to nearly +62 as the S&P 500 peaked in the Spring of 1971 (point K) which was then followed by an 11% correction from the Spring of 1971 until the late Fall of 1971 (points K to M). Meanwhile in this example the S&P 500 then was able to rally strongly again from the late Fall of 1971 until the early part of 1973 (points M to N) in which it gained another 29%.

In the next example the % difference between the Bulls and Bears began to rise sharply in the latter part of 1972 into the early part of 1973 as the S&P 500 was nearing another top after gaining an additional 29%. In this case the % difference between the Bulls and Bears reach +58 by early January of 1973 (point O). This was then followed by a massive sell off in which the S&P 500 lost nearly 48% of its value from 1973 into1974 before it made a bottom in the Fall of 1974 (point P).

Meanwhile if we look at what happened in the mid 1970's there were several instances in which the % difference between the Bulls and Bears exceeded +40 but the S&P 500 didn't sell off too badly (points Q, R, S and T). However eventually during the Spring of 1977 the large % difference of +74 (point U) between the Bulls and Bears led to a longer term correction (points V to W) in which the S&P 500 lost 17% of its value however it wasn't nearly as bad as what occurred from 1973 into 1974.



Thus from what I can see a large % negative difference (< -20) between the Bulls and Bears was very reliable in signaling a major market bottom in the 1970's while a large positive % difference (> 40) wasn't quite as reliable in signaling a major market top. However even in those cases when there was a large positive difference between the Bulls and Bears and the S&P 500 didn't sell off severely there was still some type of minor correction that followed before the S&P 500 trended higher in the 1970's.