We first wrote about the canaries in the coal mine that were warning of a correction in February. As recent as last week the canaries were still warning. Not so any longer. The canaries lived.
Most of the time when a market gets thin at new highs a correction follows, but once in a while the thin market resolves itself with rotation. That’s what we’re seeing now. The defensive sectors that have led all year are starting to under perform the broad market and the stocks that have lagged are being bought.
Our Twitter support and resistance levels had pegged 1600 on the S&P 500 Index (SPX) as the most important resistance we’ve seen since we started tracking it. There were a huge number of tweets that targeted that level. The rotation in stocks since the break out above 1600 highlights how important that level was. People who were defensive are starting to trim those positions and others who were under invested are buying technology, financials, and industrials. Even the big banks that were well off their highs are starting to break out. Citigroup (C) and Bank of America (BAC) already have while JPMorgan Chase (JPM) and Morgan Stanley (MS) are close.
The rotation and increased buying shows up in the number of stocks above their 200 day moving average and the bullish percent index. Here’s a few charts. Notice the huge move up during the last week. People are piling into stocks that as recent as last week had broken chart patterns. This tells us that the under loved stocks are finally getting some love.
One thing that is interesting to note is that our Twitter sentiment indicator is now showing weakness as the market moves higher. Today with the market moving up consistently our indicator printed zero, showing bullish and bearish opinions evenly matched. I went back and looked at the tweets that accounted for the negativity and most of them cite over bought technical indicators like the top of the Bollinger bands, McClellan oscillator, and distance away from moving averages. All of these are short term concerns, not intermediate or long term problems. It will be interesting to see if the market can actually pull back or if the overbought readings will get resolved with sideways movement.