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Top Stocks With Helene Meisler

Market Sentiment Isn't Particularly Giddy

By Helene Meisler | 2017-06-22 19:02:16.0
Stocks in Focus: LULU, KO

The Market

It’s been a while since we have discussed sentiment, mostly because it has not gotten particularly giddy nor has it reached bearish levels.

For example, the Investors Intelligence readings show bulls at 51%. The American Association of Individual Investors have bulls at 33%, pretty much where they have been for weeks. The one indicator that has moved is the various options ratios.

A few days ago we saw back-to-back readings for the ISE call/put ratio under 50% for the first time. We’ve had instances where it is a few days apart, but never back to back. The ISE Equity Ratio hasn’t been that low on a day to day basis but overall it has been low enough that the 10-day moving average has sunk quite low, to a level it doesn’t get to often.

Of course I had to check to see what had transpired in each of these times. First, here’s the chart. The red line might seem arbitrary but it’s essentially to show you how unusual it is for this moving average to get this low.

Point A is shown on the chart of the S&P here. Quite frankly I was surprised to see that it arrived at a high since often a low ISE ratio is a sign of too many puts being bought and therefore everyone is all hedged up. But you can see it arrived just days before the August 2015 plunge.

Glance to the area where the arrow is on the chart of the ISE and note that we did not see it get as low as my red line. There are two lows there. The one on the left was in January 2016 just after the market had had a short term rally, so once again it went down from this reading. The reading where the red arrow is located arrived three weeks after the low in the market, so it is different than the rest and as you can see did not make it to the red line. The market went sideways after that, but was definitely not done rallying.

Now let’s move to the latter part of 2016. We can call those twin lows in September 2016 point B. And once again we see a pullback in the S&P from both of them.

We had the final reading (point C) in late March of this year and while the decline was pretty mild, once again the result was a decline, not more rallying.

Add to this the fact that the Equity put/call ratio was 50%, the lowest readings since December 7th. That’s the blue arrow on the chart above.

Are too many folks banking on a rally into the end of the quarter? It sure seems that way. So let’s say this is another reason I still think we get a bout of volatility shortly.

New Ideas

I know we’re not supposed to like retailers but my eye keeps seeing a potential bottom in Lululemon (LULU:Nasdaq). If it can get through here it completes a funny little head and shoulders bottom and should make an attempt to get into that gap.

The flip side is that the so-called defensive stocks feel as if they are done and would rather roll over. The Utes were a chart I highlighted the other day. Now take a look at Coca-Cola (KO:NYSE). Keep in mind this rallied with the bonds and bonds keep going but this has stalled out. I’d sell this.

Today’s Indicator

The put/call ratio is discussed above and above is the chart of the ISE Ratio so that should suffice for now.

Q&A

Helene welcomes your questions about Top Stocks and her charting strategy and techniques. Please send an email directly to Helene with your questions. However, please remember that TheStreet.com Top Stocks is not intended to provide personalized investment advice. Email Helene here.

We’re going to cover something totally different here today since I was asked about the decennial pattern in the market. I will be quite honest: I had to go re-read my textbooks on it since I was only vaguely familiar with it.

The basic premise is that there is a pattern that takes place over the course of each ten year period with years ending in the same number (i.e. 1995, 2005, 2015, etc.) having similar patterns. I can tell you right off the bat that this would rarely if ever be something I would subscribe to. Heck, just look at those three years in the market. 1995 was ‘nothing but up’ and 2015 was sideways and then a big drop so they looked as dissimilar as two years can be.

The thinking is that years ending in 8 and 9 tend to be consistently good years for investing. Stop right there -- who remembers 2008? Again, I think you can see why I would not subscribe to this. It also states that years ending in 7 and 10 tend not to be great years. We peaked in 2007 but not until October and 2010 saw an awful lot of down moves, beginning with the Flash Crash in May of that year.

Here is the chart of the decennial pattern from the textbook, “Technical Analysis Explained” by Martin Pring.

With this year being 2017 and ten years prior being 2007, could this be the year the market tops out as a whole? It’s possible but look at the chart where I’ve taken the liberty of equating each year with the current cycle, rather than its own number. This means ‘1st year’ does not refer to years ending in 1 but rather the first year of the pattern through today.

Years 1, 2 and 3 would therefore represent 2008, 2009 and 2010. The patterns are quite similar and rather impressive in their matching of those years’ market movement. Year 4 would be 2011 in this example and if you don’t recall 2011, we saw a 20% decline that summer/fall and this chart shows nothing of the sort.

Year 5 would then be 2012 which was a decent year in the market but quite frankly 2013 looked much more like the pattern on the chart from year 5 (nothing but up). Therefore years 6 and 7 look more like what we saw in 2014 and 2015 with that big summer swoon in 2015.

Therefore we’d need to shift forward one year since it doesn’t line up exactly, but it is close in that 2013 looked like year 5 and 2014-2016 looked like years 6-8. The question therefore is are we in year 9 (because following that pattern, isn’t that where we’d be, since we shifted a year?) or are we in year 10?

I have no idea because again, I don’t think I could form a market opinion or view based on just the similarities to this decennial pattern.

Can I see a correction in the second half of the year? Yes, I can. We certainly have enough indicators that say we’re in desperate need of one this summer.

This was an interesting exercise and I appreciate the question because it certainly makes us take a step back and realize that patterns do repeat, even if they are not exact.

Regards,

Helene Meisler
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