As the markets finished in the red for the week, there has been a great deal of speculation about a successful test of the January lows. While that is certainly a possibility, the trend is most definitely down and we will stay with the trend until it isn't.
Some analysts have noted that sentiment has become very bearish, even more so than at the 2002 lows by some measures, but one should be extremely cautious in using such evidence to justify taking a long position at this time. Cherry picking sentiment surveys to rationalize a contrary stance can get you in trouble. We must look at the entire picture.
A number of breadth indicators have only just turned down again including advance/decline lines, McClellan Summation index, and the 5ma of new highs - new lows among others. The volatility indexes have only just turned up from the February consolidation after reversing off of the 20 period 2.0SD Bollinger Band. The Investors Intelligence survey is only a little bearish, even though the Bull/Bear spread is bullish. The 10ma of the total put/call ratio is not near its past highs of 1.30 at market bottoms. Finally, stocks are not as oversold as measured by the 5 period RSI being below 5% as they were in January. The initial January thrust down had 850 out of 2857 Russell 3000 stocks below 5% versus the current reading of 552 on March 6.
The conclusion is that while sentiment has definitely become bearish, there is potentially a great deal of room for additional downside before all measures of sentiment become bearish. Therefore, one should not trade against the trend at this time. Either be short or stay out until there are valid long signals. As an additional note, Investors Business Daily called the market in correction again on Friday March 7. While it is possible that a reversal could happen two days later, I would not trade against IBD.
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