Market sentiment is all over the place. While many have been sidelined in this market to await news on Fed policy (two weeks ago) and the result of the 'Brexit' vote (last week), we have seen an interesting divergence of opinion about market direction and sentiment.
The bulls have dug in their heels looking for more upside and new all-time highs, while the bears have done just the same, saying 'not so fast' with a weakening economy and softened leadership. Is the potential for exciting action enough for either side to lean heavily? Or, is the market going to punish both sides severely and not move at all? That may be the best bet of all.
The bullish argument is supported by some very solid trends and statistics. The price chart has turned bullish, and frankly that carries some very big weight in our analysis. Further, breadth figures have been quite impressive and turned the trend higher.
Volatility spiked last week and turned lower and has been trending down, which is a positive for the bulls. However, the VIX being near 20 is not an all clear signal, but a move below 17 would be a good start. Put/call ratios, elevated recently, have started to decline sharply.
When we see a spike in this ratio then a turn lower, that is a strong bullish indicator, especially if the ratio spikes above 1. Finally, bond yields have dropped to levels where we often see money flowing from fixed income into equities. This has helped keep a strong bid under the markets.
Further, next week is end of quarter, beginning of the month and a three-day weekend to boot. Expect volatility to come tumbling down, often good for the bull case.
The bears have several things working in their favor, too. While the price action has been constructive as said above, the markets have been rangebound for a few months. The 2100 level on the S&P 500 has been a huge challenge on four occasions, having risen up and been rejected each time.
Sentiment polls have been leaning bearish of late, but there has been a huge buildup of those in the neutral camp or waiting for a correction. Looking at specifics, all markets are under distribution with no better than a C- rating.
The top sectors are not in growth industries, and distribution days have been building up while the market uptrend is under pressure. The McClellan oscillator is in the mid-range now and not indicating any direction whatsoever, after stalling at higher levels this seems headed down.
Finally, the bullish percent index is pointing down once again after moving sharply higher earlier in the month. The amount of stocks on a buy signal from a point/figure analysis is moving lower.
Economically speaking, the US is in poor shape, and the most recent jobs report reflects it. The June report comes on July 8, and it would be tough to see much enthusiasm before that number is released.
Without much direction and bias, it pays to wait and see how the market responds to the events and the calendar. Sometimes the sidelines are a good spot to be in.