Mood Swings

I believe the most likely outcome for the coming week is a higher market but a bear case could be made as well. The market is now oversold as the S&P 500 is down 8 of the past 10 days. It seems that short sentiment has soured just as we reached this oversold reading. Anecdotally, I noticed traders were quite gloomy on Friday and the weekly poll shown below supports my suspicion. All this is supportive of  a rally this week, which is also the beginning of the month.

There is a bear case to be made as well. Despite the short term negativity, the intermediate term sentiment indicators are still close to excess optimism. The oversold reading is not great as many of the down days were only slightly down.  In recent years we have seen numerous instances where the market picks a direction and goes there in a straight line despite oversold or overbought readings.

I would much prefer it if the intermediate term sentiment indicators were showing excess negativity instead of excess optimism. I would also prefer a better oversold reading.  Still, I believe the odds favor a bounce in the coming week. As a result I am moderately long.

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