In Friday's post entitled Bears Back in Hibernation, I postulated that the S&P 500 would follow up last week's big gains with 2-3 days of low-volume consolidation then blast through 1400. Well, that's just what we got... the consolidation part, anyway. I suspect that the blast higher will come tomorrow because the consolidation was beautiful... a classic A-B-C correction, complete with RSI divergence and the beginnings of a strong bounce:
There are a couple other reasons why I believe a larger rally will ensue. First, let's look at the CBOE put/call ratio. This ratio is an excellent sentiment indicator because it measure actual bets placed.
The indicator is smoothed out with a 10-day MA, and the red horizontal lines mark the range for this indicator over the past year or so. Notice that the sentiment extremes of last February and August coincided with significant lows. Will a similar extreme reached in March provide a different result? Also note that the typical historical range for this indicator runs between 0.70 and 1.0, so the last year has witnessed a persisently high level of bearishness.
Next we have a chart of the yen versus the dollar. As we all know, the unwinding of the carry trade was highly correlated with US stock market action.
I'm guessing that, at a minimum, FXY will revisit the trendline before we see another big selloff in equities.
There are, of course, some worrisome bearish signs. For example, weekly volume has been declining rapidly during the rally off the March low, and the dollar just can't seem to get its footing (a precursor to the '87 crash was a persistently weak dollar). For these reasons, I am mitigating bullish equity bets.
And yes, I am a closet Trekky. I admit it.