Then you'll like this too (I don't) Schaeffer now short term bearish, from short term bullish, as of today's close.
"Short-term posture change: Readers of Monday Morning Outlook have certainly picked up on the bearish tone set forth in these pages over the past month. A notable exception was last week's update that included some room for short-term support, which the market realized over Monday and Tuesday. Beyond that, our outlook remained very cautious. Well, this wariness, combined with further deterioration in both the sentiment and technical backdrops, has forced our hand. As a result, our short-term equity posture shifted from bullish to bearish as of Friday's close. This change reflects our belief that short-term conditions have increased the possibility that the market will continue to deteriorate. Read on for our rationale behind this posture change.
First a look at the sentiment environment, which is displaying a positive bias despite the market's struggles. Such a scenario paints a bearish picture, since misplaced optimism typically results in market weakness.
As I have covered recently, our proprietary all-exchange, all-equity put/call volume ratio recently reached a point at which it appeared that its uptrend would reverse and form a short-term top. Normally, such tops warrant a short-term bullish bias, as it suggests that sentiment has reached a pessimistic extreme. This pessimism then unwinds in the form of buying pressure that pushes stocks higher. This time, however, the ratio appears to have pulled a fake-out and is now once again trending to higher readings (for more on this development, see my recent CLICK HERE: http://www.schaeffersresearch.com/commentary/observations.aspx?ID=10023 ). While the pessimism that is causing this ratio to move higher will eventually benefit the market when it forms a true top, weakness is suggested during the ratio's uptrend (the market and the indicator's trend typically move in opposite directions). Thus, while the uptrend is intact, caution and defensive positions are the way to go.
As I've continued to identify, the 18 level on the CBOE Volatility Index (VXO – 19.07) has been key since December 2003. Since then, the 18 mark has provided resistance, having stopped the "fear index" from closing higher four out of six times. Each of the four successful stops served as fairly good short-term bullish signals. What about the two failures? The first came after the major indices had shed nearly three percent and was followed by a loss of an additional 3.3 percent. The other occurrence? Well, we'll see soon enough since the latest failure of the 18 level to hold the VXO at bay occurred on Friday. The bottom line here is that the fear barometer has now broken key short-term resistance and is likely to move higher, another indication of short-term market weakness.
Sticking with the VXO for a moment, it's worth pointing out that both its 10-week and 20-week moving averages are now trending higher. This is the first time that both trendlines have been increasing since October 2002. A longer-term uptrend in these moving averages would be bearish for the market. Note also that similar to the SIR equity put/call ratio (described above), a pattern of higher highs and higher lows is beginning to emerge on the VXO, which would add more bearish fodder to the market.
Much like our put/call volume ratio, the Rydex ratios (ratios of assets in bullish and bearish mutual funds) formed somewhat of a fake-out. After reversing course, the trend is now following a path that is indicative of continued market weakness. The activity in these ratios will likely lead to lower readings before the market places a short-term bottom. These lower readings may take the ratios to levels below those experienced in March. Only when these ratios bottom (an extreme in pessimism) will the market see smoother sailing to the upside (due to an unwinding of this pessimism).
Moving on to some technicals (which I don't normally delve into too deeply in our weekly update), some activity involving the major indices warrants attention. Last week, both the S&P 500 Index (SPX – 1,098.70) and the Dow Jones Industrial Average (DJIA – 10,117.3) encountered resistance from their respective 10-week moving averages. This trendline provided significant support as the market rallied through much of 2003. Now, the 10-week has reversed direction and is acting as resistance for both indices. In addition, these 10-week moving averages have crossed below their 20-week trendlines (a bearish crossover, in technical terms), adding to the bearish sentiment case put forth above. The next trendline in the sand? The 40-week moving averages, which currently lie at 1,080 and 10,040 for the SPX and DJIA, respectively.
So what should you expect? The continued activity in our sentiment indicators as well as the weakening technicals and lackluster fundamentals (e.g., very heavy equity mutual fund inflows in January, February, and March resulted in little to no positive price activity for the market) paints a bearish picture. So what I've said for the past month or so still holds - cash, protective puts, and defensive positions are the minimum you should consider for your portfolio. Those with the proper knowledge and experience may also look to short positions to benefit from any continued weakness."
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