More Bulls Now Than In May

I was fully expecting to see futures up big this morning.

Last night they were headed to the moon as China's CPI was about to come out.  It came out lower, slowing to 1.8% from 2.2% while wholesale prices dropped a deflationary 2.9%.  The conventional wisdom says these numbers now leave the door open to further easing, yet futures rolled over sharply.

Yesterday the VIX closed at the lowest level since March 26th, and Mark Hulbert, whom I never read or listen to, warned to watch out for a correction -- or worse. 

Ordinarily I don't like to see this sort of warning when I'm thinking the same thing.  But I bit; I actually read what he had to say.

Odds of a stock market correction are now quite elevated.

That’s because stock market timers are now more bullish than they were at the May 1 bull market high, even though the market averages are still slightly below those previous highs. This is not good from a contrarian point of view.

Consider the average recommended stock market exposure level of the shortest-term market timers monitored by the Hulbert Financial Digest (as measured by the Hulbert Stock Newsletter Sentiment Index, or HSNSI). This average currently stands at 50%.

At the May 1 bull market high, in contrast, this average stood at 42%.

Meanwhile CNBC says everyone is bearish. 

Apparently Hulbert has been tracking the advice of more than 160 financial newsletters since 1980.  I think I'll side with him on this one.  In Elliott terms this is exactly what occurs at the end of a 2nd wave: it recreates the psychological conditions of the prior high or low.  8% more bulls at a lower high is a perfect set up.

Indeed, the current set up on the S&P could yield a sharp decline today to around 1387.  It could also be the start of a major down phase that I've been expecting that would target the 1150 and 1074 areas.  Or at 1387, there could be perhaps one more rally to one more new high.

I'm starting to see some capitulation in the bear camp.  That's good.  They could also be right, too.  But another marginal new high won't change things much, especially if it occurs with a continued slackening of momentum.

However, a new high with wide price spread, broad participation, and an increase in volume probably would change things.