S&P 500: Bullish Sentiment High In Overbought Market

As the market hits new highs, bullish sentiment is reaching extreme levels. A quick look at the S&P 500 (^GSPC) bullish percent index shows us to be significantly overbought.

We have a lot of economic reporting this week, particularly relating to employment and manufacturing, along with the continuation of earnings season. Meanwhile, index charts are in a clearly bullish orientation. It would be nice to see some sideways action, which would work off overbought conditions and set up more charts for low-risk entries.

Here are charts of some current holdings:

- PEGA

- RADS

- NVEC

- GXDX

- MSPD

- EXC

- CVGW

- BMRN

- CRDC

Meanwhile, as we see a Newsweek cover proclaim the recession over, claims of even a jobless recovery still seem premature. Along with some encouraging recent economic data and corporate earnings, we hear federal tax revenues are plummeting:

The numbers could hardly be more stark: Tax receipts are on pace to drop 18 percent this year, the biggest single-year decline since the Great Depression, while the federal deficit balloons to a record $1.8 trillion.

Other figures in an Associated Press analysis underscore the recession’s impact: Individual income tax receipts are down 22 percent from a year ago. Corporate income taxes are down 57 percent. Social Security tax receipts could drop for only the second time since 1940, and Medicare taxes are on pace to drop for only the third time ever.

The last time the government’s revenues were this bleak, the year was 1932 in the midst of the Depression.

This is a natural consequence of job losses and reduction of household net worth:

Americans in the peak year of 2007 had a net worth of $64.2 trillion. A sizeable portion of that net worth has evaporated. In fact, that $64.2 trillion is now valued at $50.3 trillion. A 21 percent cut to the American household balance sheet. Now much of this has come because of the housing bubble bursting and the subsequent stock market crash. Even in the Great Depression, household wealth did not evaporate so quickly.

Karl Denninger digs into last week’s GDP report, and says things are worse than they look, especially when you focus on the consumer (non-governmental) side of the economy.

The consumer is tapped out - as I have repeatedly noted, including on Kudlow’s show, consumer debt peaked in January of 2009 and is on a decline. This means that spending is going to decline, and now we’re seeing it. Durable goods orders were down (despite the pumping of “better” durables reported month after month on CNBC!) and non-durables - that is, consumed goods (in the short term) decreased as well. Services were essentially flat - no surprise, given that many of them are inelastic (health care anyone?)

Denninger notes that we still have considerable consumer deleveraging ahead. While the government can certainly re-inflate the bubble through bailouts, clunker programs, and other mass expenditures of public wealth, it is a poor substitute for an economy that rests on the spending power of individuals.

So I am not a green shoots believer. But for now the bulls have control of this market.

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