19/12/2016 TheSentimentSignalSuggestingStocksCouldGoFlatSchaeffer'sInvestmentResearch

THE SENTIMENT SIGNAL SUGGESTING STOCKS COULD GO FLAT

Stocks have hesitated at some key round-number levels, but fortunately for bulls, sell-os haven't ensued

Stocks quoted in this article: NYA | MID | SPY | SPX | IWM | DJIA

12/19/2016 8:31 AM

Since the early November U.S. election, stock market momentum -- at the expense of the bond market -- has been the big story, with
questions raised in the media about equities rising "too far, too fast." Moreover, in this space during the past couple of weeks, potential
hesitation points have been pointed out -- such as Dow Jones Industrial Average (DJIA - 19,843.41) 19,000, which was sliced through like a
knife through butter; and the S&P 500 Index (SPX - 2,258.07) 2,200 century mark, which is now 58 points below the index's Friday close.

ToddSalamone Follow
@toddsalamone

$IWM20%YTDapotentialhesitationarealike+10%YTDwas
fromAugNov...Also,135strikesiteofpeakDec.callopen
interest$RUT$SPX
1:59PM7Dec2016

ToddSalamone Follow
@toddsalamone

$IWMbacktoround20%YTDand$SPXpullbackbackto+10%
YTDarea.Today'shighonNasdaqCompositejust31ptsshy
10%YTD
5:32PM14Dec2016

ToddSalamone Follow
@toddsalamone

Add$MID20%YTDandNYSECompositeIndex($NYA)at
round10%YTDtolistofroundnumberhesitationpointsas
$DJIA20ksitsjustoverhead
2:07PM16Dec2016

Per the observations I made on Twitter during the past couple weeks, other round-number areas seem to have nally slowed the momentum,
with the iShares Russell 2000 ETF (IWM - 135.91), which had shown leadership from the early November low, declining slightly last week.
Moreover, equity benchmarks we did not discuss in recent weeks -- speci cally, the S&P MidCap 400 Index (MID - 1,667.73) and NYSE
Composite Index (NYA - 11,125.22) -- stalled at round-number year-to-date percentage gain levels of 20% and 10%, respectively.

In fact, MID's month-to-date high so far is at 1,698 -- just a couple points shy of the round 1,700 level. Like IWM, this index has also displayed
leadership since the election.

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"We move into this week's standard December options expiration week with the SPDR S&P 500 ETF Trust (SPY - 226.51) trading slightly above the
$225 area... The $225 level coincides with S&P 500 Index (SPX - 2,259.53) 2,250, a half-century mark -- and such half-century marks have
historically acted as magnets during trading range behavior and/or key pivot areas after a big advance or pullback... The importance of these
half-century levels could be due to the heavy open interest that tends to build up on SPX and SPY options at these strike prices that represent
half-century levels on the SPX. Coincidentally, the $225 level on the SPY is also around its 2016 10% YTD return level."
-- Monday Morning Outlook, December 12, 2016

Last week, in addition to the Federal Open Market Committee (FOMC) interest rate decision, was also the expiration of standard
December options. Indeed, the SPDR S&P 500 ETF Trust (SPY - 225.04) did hesitate around the signi cant 225 strike level, which coincides with
the SPX 2,250 mark. This was not a major surprise, as the 225 strike was home to the last signi cant call open interest in the December series,
some 5 points below the next heavy call strike at 230.

And as we said last week, throw in the fact that this area resides around the round 10% year-to-date return, and SPY's hesitation here makes
sense. With a sell-o occurring in the immediate aftermath of the Fed meeting, the big call open interest at the 230 strike was never seriously
challenged -- even though the potential for this was alive, with the Fed acting as a potential catalyst.

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Fortunately for bulls, stocks in recent days have only stalled at these round-number resistance levels, versus actually selling o . So, on the
charts, the technical backdrop appears sound, punctuated by the recent all-time highs. Internally, breadth is suspect, as the number of
advancers has declined, even with the SPX recently hitting highs.

Moreover, we are seeing optimism come into the market, which usually occurs prior to a sell-o or trading range behavior. For example,
newsletter advisor optimism, per a survey by Investors Intelligence (II), is at the highest level since July 2014, with the di erence between the
percentage of bullish advisors (59%) and bearish advisors (19%) at 40 percentage points. This di erential is an extreme reading, per the chart
below, and since 2011, sentiment extremes of this magnitude have typically preceded either trading range or corrective price action.

In fact, the bulls-minus-bears di erential in the weekly Investors Intelligence poll ranks in the 93rd percentile of all other such readings dating
back to 1972. Looking back over this time frame, we have quanti ed the historical price action of the SPX based on the percentile rank of the II
bulls-minus-bears reading. The data suggests that the optimism isn't necessarily an alarm bell for bulls to exit, but it does suggest that the
expected returns over the next days and weeks are at, and far below the "normal" returns for various time frames (see the table below the
chart).

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If you are a short-term trader, be open to trades on both the short and long side of the market. If you are a long-term investor, do not disturb
your bullish positions.

Continuereading:

Indicator of the Week: Why the S&P's Rally Could Continue Through New Year's
The Week Ahead: GDP, Nike Earnings to Hit the Street

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Article by
Todd Salamone

2016 Schaeer's Investment Research, Inc.

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