SPX Update: Yet Another Top Signal -- and Sentiment Suggests a Confused Public

This weekend, I was studying some data from the Yale School of Management which I found intriguing.  I can't post their charts in this article, because I didn't receive written approval in time for publication, but I will link to their site in a moment.

Yale tracks a number of sentiment indicators, among which is their "Crash Confidence Index."  The CCI survey measures confidence that there will be no stock market crash in the succeeding 6 months -- and it has now reached levels nearly equivalent to the levels after the 2008 crash.  This is a contrarian indicator, so those lows would generally be interpreted as bullish for the market.  Here's the link to Yale's chart.

Flying in the face of that data, we have the American Association of Individual Investors sentiment survey, and it, too, measures investor expectations over the next 6 months.  This survey shows that the number of bearish investors is still hovering at readings which are extremely low by historical standards.  This would be considered bearish for the market, as a contrarian indicator.

So which is it, investors?  How is it that less than 19% of investors are bearish about the market over the next 6 months, and yet at the same time, the number of investors who think a crash is possible over the next 6 months is near all-time highs?  Has John Kerry been the sole respondent in these surveys?  (Actual quote: "I voted for it... before I voted against it.")  These two pieces of data seem completely contradictory, so I'm left with the conclusion that the public must be very confused.

The charts are also giving some signals of indecision, as this week the S&P 500 (SPX) formed a doji candlestick on the weekly chart, which is an indication that buyers and sellers have reached equilibrium.  A single doji by itself only predicts a reversal approximately 50% of the time, so it has roughly the same predictive value as a coin flip. 

Since the doji by itself has no predictive value, I dug deeper into the charts.  I noticed that the Nasdaq Composite (COMPQ) closed the week more than 1% higher, so I decided to back test prior occurrences where the SPX closed the week virtually flat after a well-defined uptrend, while the COMPQ closed the week greater than 1% higher.  I added the 10 Year Treasury Yield (TNX) into the mix as well, with the qualifier that yields closed the week lower, to further narrow the results and to add another logical component to the study.

The logical components of the study are as follows:

1) SPX roughly flat is suggesting indecision after an uptrend.
2) COMPQ is suggesting investors are now chasing the rally in the riskier Nasdaq stocks.  This is somewhat common to see at the tail end of a move.
3) TNX yields falling flies in the face of the Nasdaq surge and suggests that smart money is in "risk off" mode.

It's an interesting result.  This has only happened three times in the prior six years -- two of those three occasions marked virtually the exact top for SPX; but in 2007 the SPX still had a hair farther left to run on the upside.  On other occasions, COMPQ failed to reach the "greater than 1%" qualifier -- two of those are mentioned below, but are not included in the results since the qualifiers failed.  In the chart below, the SPX is in the center panel.

Add this to the mix of the dozen other indicators we've looked at over the past couple weeks which also suggest a top, and we have the markings of either an actual top in progress -- or a market that is being so distorted by the money flood from the world's Central Banks that these indicators simply don't work under these abnormal conditions.  I suppose our government does have a vested interest in keeping the market afloat, since they have huge stock holdings in companies like General Motors (GM), American International Group (AIG), Citigroup (C), and others.  And, to use just one example, GM's stock needs to double just for Uncle Sam to break even.  Can you say "moral hazard"?

Anyway, much as I'd love to go off on a rant right now, I'm going to move on to the next chart. 

The decline off the 1333 high in SPX can be counted as an impulse wave and subsequent completed correction.  It's a bit ugly and very complex... however, assuming it's an impulse, then it's a first wave -- and first waves are often ugly.  Below is my preferred very-short-term count.  This count suggests that the top is now in place at the 1333 high.  Interestingly, 1333 is almost exactly double the March '09 666 low (as pointed out by one of my readers, "billabuster").  It's also the level at which wave (y) equals .786 Fibonacci times the length of wave (w). 

Here's the very short-term SPX chart, which shows my preferred count of the decline as wave 1 of a new impulse wave lower. 

Next is a slightly larger view.  This is the same chart from Thursday and Friday, which shows that the Minor (2) rally appears to have completed in the blue target box.  To be fair, if this is the actual top, it has kept me running -- and my short-term alternate counts have been the ones hitting targets.  I keep trying to place a cap on the top, and the rally keeps blowing through it.  However, also to be fair, in prior articles I have plainly expressed my lack of certitude in the short term counts of the structure.  At this point, I now feel a reasonably high degree of confidence in my short term counts.  In any case, if this top sticks, I can still accept kudos for the big picture count... if it doesn't, I have several crows warming up in the oven. 

The bears need to hold the rally below the 1333 high, and start moving the market beneath the three red support zones shown on the chart.  The chart is labeled as “invalidation for bear count” – but this is specific to the count shown and only a short-term invalidation, not long-term.

This is the first time I've felt reasonably confident that the top could be in since the rally started.  This is primarily due to several factors: the first is that the entire wave structure finally seems to reconcile very well (for once); the second is due to the fact that the Dow Jones Industrials came just about as close as they could to the 2011 top; and the third is the combined weight of the numerous market studies I've shown over the past couple weeks, which are all screaming for a top -- as well as the current study shown at the beginning of this article.  I feel like it's now or never for the bears here. 

However, the count above would be invalidated with trade higher than 1333, and until the market starts breaking some key support levels, there's still nothing to indicate a true trend change.  The market hasn't even broken down from the blue channel yet, so conservative traders may want to give the rally the benefit of the doubt.  I'm attempting to anticipate a reversal, which can be a dangerous activity for traders who aren't nimble.

In conclusion, as I've stated on numerous occasions, until the Dow breaks its 2011 highs (among other things), I remain a bear.  I'm going to go on record here with a bold (and possibly stupid -- we'll see) call and say that it's my belief that the top is now in at 1333.  Assuming the market continues lower from here, we'll start looking at targets if and when the market confirms this view -- and I'll attempt to determine at that point if this is, indeed, the significant top we've been expecting, or only a smaller correction.  Trade safe.

The original article, and many more, can be found at http://PretzelCharts.blogspot.com