Psychology is Slipping, but Monetary and Valuation are Strong

We've been telling you over and over to make sure that you don't let the weaker Psychology Composite escalate your cautiousness too much.  That's still true, but I have to say that Psychology would certainly be enough of an excuse to allow a 2-3 month pause (mini correction).  I think it is important that we show you some of the evolutions in some of our key Psychology components.  However, remember that each of these components is only a part of our larger composite...and that Psychology is only one-third of the entire story.

The NASDAQ Oscillators are a good place to start.  In the chart below, you can see the peak made in the shorter-term McClellan Oscillator in July of last year, the correction in August, and then the next higher low in September.  We had one quick higher low in January, but now it is sitting in the middle.  That is about as good of a description of the stock market we've seen since last September as you can get. 


The one indicator that gives us the strongest pause signal comes from the OEX data.  If you remember, these are the very historically smart option traders that saw the impending collapse of 2007-2008.  However, you don't make any irrational decisions when you get a strong signal from just one of these indicators.  The open interest part of this "dual indicator" is the more reliable of the two, and it has not yet touched that dotted red line, as seen in the chart below.


Today, most of the Psychology Composite indicators are confirming an increasing loss of strength in Psychology.  We know from many years of watching the "Wall of Worry," that in general, Psychology is the best at giving advance notice of a bottom.  But as the market rallies, Psychology weakens, and until Monetary joins in - in other words, until the Fed starts to cool the current optimism - the stock market feeds off the new euphoria.  It is our hopes and anticipation that we will see a multi-year bull market.  So, we also hope that we will get a pause here so that some healthy fear from the dumb speculators and some optimism from the smart investors and speculators will allow a little normalization in the Monetary component.  If we get our druthers, you will not see a serious long-term correction until our Monetary Composite drops into the M5 or M6 zone.  And remember, today that composite is at M1, it's most positive level, along with our Valuation Composite at it's most extreme positive level

Don Hays

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