I remain bullish because the S&P 500, Russell 2000 and S&P 600 are all in well-defined up-trend channels. The Bollinger Band Width measurement indicates that the S&P 500 is being compressed, meaning an outsized move should occur shortly. I believe that move will be higher because the S&P 500 has consolidated above support from three previous attempts at new highs.
More specifically, the S&P is currently forming a triangle consolidation. A move above 1237 would indicate a break-out while a move below 1226 would be worrisome.
And while the S&P 500 holds above support, the real key to the market’s direction lies with the leading Russell 2000 and S&P 600 indexes. Both indexes are currently resting right on support from a rising channel. The small caps need to rally from this point forward, otherwise, they will break their channels and signal a further consolidation and potentially, a breakdown. I will be monitoring the Russell 2000 closely because it has already broken a steeper trend line. While I expect the indexes to remain in their up-trends, I will become more defensive if the Russell 2000 breaks below 654 and S&P 600 breaks below 344.
The bears will argue that sentiment is too bullish to support new market highs. They point to increased speculation in such stocks as Google (GOOG) and Baidu.com (BIDU) as a sign of an over-heated market. However, a fairly well known indicator is showing that speculation is actually running towards the lower end of historical extremes. The NASDAQ volume/NYSE volume indicator reveals that speculation is quite subdued. The higher the level of NASDAQ volume compared to NYSE volume, the higher the speculation in the market. As a historical guide, during the year 2000, NASDAQ volume was running almost 2x NYSE volume. Currently, the ten day moving average of the indicator is closer to 1.0x, which has marked bottoms, than 1.5x, which has marked tops, in the recent past.
In addition, bears have argued that the high number of bulls in sentiment surveys is a major negative. And while the sentiment surveys reveal a fair amount of bullishness, the total number of bulls stands at much lower level than previous market tops. I find it helpful to aggregate the various sentiment surveys (AAII, Market Vane, Consensus and II) into a single indicator. The following chart shows that the total number of bulls in all surveys is lower than last year’s readings despite the fact that the S&P 500 remains near multi-year highs. I believe the study reveals that sentiment will have to become more bullish before it marks a more significant top.
