Stocks: It's Decision Time - Part II

Just a quick follow up to the previous post from yesterday. Many markets now stand at watershed. It is time for market participants to decide what the main assets class will do over the coming short to medium term. US Dollar is in a rally mode as of late, slowly approaching resistance, while Treasury Bonds - just like equities - are stuck in a range. Reminder of 2008 is everywhere, so we will soon find out what awaits us...

Keep in mind that during a bear market, usually the price does not exceed the 200 day MA a.k.a 40 week MA. Majority of the time, as the index approaches the 200 MA, that level acts as a resistance.

Also keep in mind that during a bear market, usually the % of stocks above 200 day MA does not exceed 50%. As it approaches 50% threshold area, that level tends to act as a resistance. Continuation of a March 2009 cyclical bull or a start of May 2011 cyclical bear market? To answer that question, over the coming days I will be focusing on the Credit side of the market, which tends to lead equities.

As an aside note, I have failed to figure out what everyone is so bullish about. I mean, I constantly read opinions of other bloggers who claim that economy is improving (linking Citigroup ESI as their proof), that EU is closer to a solution or its own QE program, or that there is a success with soft landing in China (showing M2 growth and PMI data as their proof). Sure, I can go ahead and number any of positive (or for that matter negative) points, but the price of the market matters more than anything.

Consider that Investor Intelligence Survey showed bullish sentiment rose and bearish sentiment declined every single week in the last four weeks and yet the equity markets have failed to make new highs. The numbers in the chart above are the exact dates of when the sentiment readings came out. S&P 500 is lower today, than it was at point (1) and yet there are now 47.4% advisors who are in the bullish camp, as opposed to 40% four weeks ago. I particular blog I follow, which was super bearish during September, is now recommending no short exposure as the market has further upside.

On top of that, consider the chart above, which shows the 10 day average of Rydex bullish fund inflows. We have the strongest bullish inflows of funds since August 2009. Fund flows tend to be a contrarian indicator majority of the time, but it is important to understand what the trend is. Strong inflows are common in early parts of a new cyclical bull market that moves from extremely oversold conditions, like in middle of 2009. These early inflows are not a negative signal to the markets advance. However, strong inflows are not that good of a sign three years into the bull market cycle. It is hard to say if the signal in the chart above is truly a real sell signal. Nevertheless, even though Rydex is considered dumb money, not every buy or sell signal works, but do keep in mind that majority of the time it doesn't pay to follow the herd!

So the question is... what is everyone so bullish about? It is not as if their portfolio is increasing in value with the price breaking out. The truth of the matter is, S&P 500's euphoric surge into October 27th connected to the Eurozone EFSF news, touching the highs of 1,292 is yet to be exceeded by the bulls. If the market breaks to the downside, it might not be the end of the world as we still have supports at 1,200 and 1,100 - but nonetheless it might prove that bulls, once again got too confident, too soon. That is something I already discussed last week (article: Stocks: Are Bulls Over Confident?). Until we exceed 1,292 or lets say 1,300 to round it off, I wouldn't really join the bullish camp like a "market-pro-expert-guru-advisors" from II Survey or the "herd follower" from the Rydex camp.