Can the Markets Go Much Lower?

• Posted by Greg Harmon
• on January 28th, 2014

Well of course they can. There is nothing to stop a 10%, 20% or even 50%. But there are some signals that suggest that maybe it will not be a big pullback. The Performance chart below shows the one week performance of the S&P 500 ($SPX, $SPY) Dow Jones Industrials ($DJIA, $DIA), Dow Transports ($DJT, $IYT), Russell 2000 ($RUT, $IWM) and Nasdaq 100 ($QQQ, $NDX). What do you see? Over the week all markets are off between 2 and 4%. But what I want you to focus on is that the biggest move, in the Transports, is is about 5% from peak to trough. 5%. That is it. Now take a look

at the second picture. It shows the Stocktwits sentiment for these indexes (except for the transport) over the past 2 months. Looking at the right side of the charts you can spot the highs in sentiment. They are roughly where the the market topped. Since then they have all fallen off substantially and quickly. Moves of over 20 points in sentiment in a couple of days and the Dow Industrials nearly 40 points. This tells me a couple of things. First, like
I have been saying all along, the bullish sentiment has not really been as strong as the polls have been showing. Investors are skittish. Second, with a swing to these lows so quickly can the sentiment fall much further? Sure it can from a mathematical perspective. But it

seems more likely that sentiment is overwhelmingly bearish and this is where buyers appear. I am not from Missouri, but I need the market to show me that it wants to rise, so I will be waiting for that broad signal and looking at individual names for signs as well. But these pieces of evidence tell me that a turn may be coming soon, and that means that this pullback is not likely to reach large levels.

Want to learn more about Dragonfly Capital Views?

Dragonfly Capital Views Performance Through January 2014 Expiry and sign up here for the free 7 day trial before you pay.

If you like what you see above sign up for deeper analysis and trading strategy by using the Get Premium button above. As always you can see details of individual charts and more on my StockTwits page.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

blog comments powered by Disqus