Unless it’s 2003 (i.e. a real recovery year) all over again.
See, earlier we noted that the AAII sentiment index is officially in uber-bull territory, with optimism hitting a two-year high.
This is of concern to BTIG’s Mike O’Rourke, who has been turning cautious everytime this sentiment index jumps. But..
Despite the flat performance of the Equity market, it was truly a mixed day. One key negative
was the 70.34% Bullish reading on the AAII sentiment survey. After the very pessimistic reading
in early July, we noted that we expected the July 1st low to be the equity market low for 2010.
We frequently mention that we think very highly of this indicator and that a reading above 70%
Bullish is a “sell signal.” This is the first such sell signal since February 23, 2007. This reading is
not enough to shift us out of the Bullish camp, but it makes us cautious. As we have noted in
the past, 2003 serves is the caveat for adhering to the sell signal when economic data begins to
show signs of improvement (chart below). If economic data begins to exhibit signs of recovery
as it did throughout 2003, the market can continue to rally despite AAII being in sell territory
most of the year. That leads into the positive news of the day, which was the Initial Jobless
Claims report. Today’s reading of 434,000 claims was the second lowest of 2010, and you have
to go back to the summer of 2008 to see consistently lower readings. As we have advised since
August, if we continue to follow similar patterns to last year, there is a high likelihood that Initial
Claims will break below 400,000 before year‐end.
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