Mid-Month Update: Bullish Sentiment Heating Up By: Christopher Mistal | July 14, 2016 | Email | Print

Contrary to past election-year July’s, this year is well above average even with more than half a month’s trading remaining. As of today’s close, DJIA is up 3.2%, S&P 500 3.1%, NASDAQ 4.0% and Russell 2000 has gained 4.4% thus far. If we include the gains from the last three days of June, the results more than double across the board; 8% for DJIA, 8.2% S&P 500, 9.6% NASDAQ and 10.4% for the Russell 2000. DJIA and S&P 500 are trading at new all-time highs while NASDAQ and Russell 2000 are not. New all-time highs by NASDAQ and Russell 2000 would provide further evidence that this rally is for real and would likely put DJIA 18000 and S&P 500 firmly in the rearview mirror.

 

 

The explosive move higher off of June’s Brexit low on June 27 is clear in the above charts. All four indices plunged below their respective 50- and 200-day moving averages when the vote tally was announced, but quickly rebounded as the reality of the Brexit process became clearer and central banks around the globe became even more dovish. The surge higher has pushed all but NASDAQ through projected monthly resistance (red dashed lines) and sent Stochastic, relative strength and MACD indicators towards overbought.

 

So far, there has actually been very little central bank action. Even the Bank of England decided not to cut rates today which came as a surprise for many as traders had priced in a more than 80% probability of a cut today. Canada’s central bank did nothing on Wednesday. If the rally is being fueled principally by central bank stimulus hopes, it could fizzle as quickly as it began.

 

Investor and trader sentiment is also quickly approaching frothy levels. Investor’s Intelligence Advisors Sentiment survey showed bulls surging to 52.5% in their most recent release. This was the first time since early 2015 that the bulls exceeded 50%. Correction advisors shrunk to 22.8%. Bears ticked slightly higher to 24.7%. This sent the bull/bear difference to its highest level since early 2015 as well. When the crowd is bullish, risk rises as capital on the sidelines is most likely dwindling. 

 

 

Today marks the end of NASDAQ’s mid-year rally and is the last bullish day on the July Strategy calendar ahead of the frequently volatile week after options expiration week. Tomorrow marks the start of July’s short S&P 500 trade detailed last week. Technical indicators are stretched, sentiment is near frothy levels and so far, additional promised central bank liquidity is a no show which improves the odds of this trade succeeding.

 

ProShares UltraShort S&P 500 (SDS) was added to the ETF Portfolio on July 8 when SPDR S&P 500 (SPY) first traded above $211.66. SDS average price on that day was $17.39 and an initial trailing stop of 5% equals $16.52. Continue to Hold SDS. Stop only if SDS closes below its stop loss price.