Playing Devil's Advocate

In this post I want to play devil's advocate and look at the case for a continuation higher in the market. Most good tops show extreme bullish sentiment. However, the put/call ratios are pointing to neutral sentiment at the current juncture. Below is a chart of the 10 day moving average of the put/call ratio. At most good tops the line is at the bottom of the page. Currently, we are nowhere near the bottom and unlikely to get there soon.

This is somewhat surprising given that the Investor's Intelligence survey is showing extreme bullish sentiment and Rydex traders are at their most bullish positioning ever. However, the American Association of Individual Investors survey is also showing neutral sentiment.

The announcement of cash takeovers and large share repurchases on an almost daily basis furthers the bull case. At the same time the secondary offering calendar has been light given how high the market has climbed. The government is planning to sell its stakes in AIG, GM and Ally this Summer. That could add up to over $40 billion in new supply. Until that happens the supply/demand equation still favors the bulls.

A good case can be made for the bulls, which is why I have only decided to move to a market neutral posture rather than a short posture. I would be willing to go net short if more of the sentiment indicators lined up to show extreme bullish sentiment or if we get closer to the AIG re-IPO, which should introduce $20 billion in new supply to the market.

 

 

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