Chart Advisor: Pessimism Peak?

By J.C. Parets & All Star Charts

Monday, 13h February, 2023

1/ It’s Time to Fade the Bears

2/ Well-Deserved Digestion

3/ Truckers Take the High Road

4/ Are Beans About to Run?

Investopedia is partnering with All Star Charts on this newsletter, which both sells its research to investors, and may trade or hold positions in securities mentioned herein. The contents of this newsletter are for informational and educational purposes only, however, and do not constitute investing advice.

1/ It’s Time to Fade the Bears

We use sentiment data as a contrarian indicator. Yet while optimism begins to increase, the more important point is that it’s turning away from levels of extreme pessimism.

When we look at weekly survey results from the American Association of Individual Investors (AAII), bears have outnumbered bulls for 98% of the weeks over the trailing twelve months. That’s the longest stretch for the bears in over thirty years. 

Any increase in the share of bulls at this point would be a positive development for stocks, as extreme pessimism begins to unwind.

Inflection points in sentiment such as this often support sustained rallies for the stock market. Just notice how key market lows over the years coincide with peaks in this indicator. 

As such, the contrarian move today suggests fading the bears, not the bulls. It appears the unwind could already be underway, as last week was the first week of bulls outnumbering bears after 44 consecutive weeks of the opposite.

2/ Well-Deserved Digestion

At last Friday’s lows, Cathie Wood’s flagship growth fund, the Ark Innovation ETF (ARKK), was in about a 15% drawdown from just over a week of selling pressure. While this sounds like a rough selloff, when we zoom out, there is nothing out of the ordinary about it.

ARKK rallied roughly 50% from late December to its highs in early February. Today, buyers showed up and halted the corrective action from last week at a logical level. 

Here’s ARKK shown bouncing off the 38.2% retracement level of its recent advance. This key Fibonacci number is the first zone of potential support we would expect to come into play following January’s rally. So far, it is doing just that.

Another positive development from the recent price action is momentum hit overbought for the first time since the summer of 2021. This confirms the new multi-month highs from a few weeks ago and indicates buyers are becoming more aggressive.  

3/ Truckers Take the High Road

With participation expanding across equity markets, a growing list of sectors and industry groups stand out as potential future leaders.

When we look within industrials, one group that stands out is truckers, as they continue to outperform their peers and make new highs on a relative basis.

Last month, the Dow Jones Trucking Index burst higher from a 16-month base versus the S&P 500, achieving new all-time highs in the process. This is just the latest procyclical industry group to show impressive relative strength. We’re seeing similar action from semiconductors, homebuilders, and capital markets, just to name a few.

As long as this breakout sticks, this group of stocks could outperform over longer timeframes. 

4/ Are Beans About to Run?

Grain markets are starting to heat up as harvest time approaches, and soybean futures have our attention.

Check out the big multi-month base on the daily chart:

Breakouts from bottoming formations such as this can have huge upside potential. When an asset outperforms its alternatives, it tends to lead to sustained uptrends. 

Notice soybeans’ relative trend versus the broader commodity complex. It’s already breaking out a big base. As long as this relative trend remains intact, it could just be a matter of time before soybeans catch higher on absolute terms.

—

Originally posted 13th February, 2023