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Technically Speaking: Is the Drop in Individual Investor Sentiment Bullish or Bearish?

Joanna Kong
Yahoo Finance Premium

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With this week’s price and news drama, market sentiment (at least as per a few readings) has gone almost to panic mode. This suggests a bounce is here or very near. The American Association of Individual Investors (AAII) poll this week saw bullish sentiment decline eight percentage points to 21.4%. That is the fewest bulls in the AAII survey since December 2018, when the market was cascading lower. Bears rose 6.2 percentage points to 39.4%, widening the spread between bulls and bears to -18 percentage points. This is not far from the pessimism we saw in early August and in December, when bears exceeded bulls by 26.5 and 27.8 percentage points, respectively.

In the options market, the total CBOE put/call (P/C) ratio rose to an elevated 1.27 Wednesday, almost matching the highs from August -- when we saw consistent readings above 1.1 and quite a few daily readings over 1.2. The 200- day moving average for the total P/C is 0.97, so fear is definitely back in the options market.

The five-day average has jumped to 1.13, close to levels in August when the last pullback ended. The five-day equity-only P/C has risen to 0.74 from 0.57 just a few weeks ago. This is approaching excessive pessimism but needs to get to at least 0.80, as it did in August, for at least a short-term buy signal.

Conclusion: It’s been a rope-a-dope stock market for those who remember the great Muhammad Ali. Many punches, but the market keeps standing. If the punches ever stop, look out above. If they don’t, the bear may come to Broad and Wall.

Zimmer Biomet (ZBH)

Zimmer Biomet is the nation's largest pure-play maker of orthopedic devices. It designs, develops and makes reconstructive orthopedic implants, including joint, dental and spinal implants; trauma products; and related orthopedic surgical products. Primary customers include musculoskeletal surgeons, neurosurgeons, oral surgeons, dentists, and hospitals.

ZBH broke out to all-time highs after the company posted better-than-expected quarterly results on July 26. The surge occurred on huge volume and completed a large cup-with-handle formation. The breakout also took out key chart resistance at $130 that has been in place since 2016. Since the break higher, the shares have gone sideways between $130 and $143.50, working off an extreme overbought condition on the daily chart. ZBH has held up better than many stocks, a bullish sign. According to Investors.com, ZBH has high Relative Strength (RS) and Group RS ratings.

We would put a stop-loss just under support at $126. We would take profits in the $155/$160 area if resistance at $143 gives way.

Yum! Brands (YUM)

Yum! owns three of the most-popular fast-food brands in the world: KFC, Pizza Hut and Taco Bell. The company and its franchisees operate more than 48,000 restaurants in 140 countries and territories. Yum! is a leader in multibranding, offering combinations of its KFC, Taco Bell and Pizza Hut brands at single locations.

The YUM shares broke out a sideways consolidation to all-time highs in early June on higher-than-average volume. The shares then drifted sideways before breaking out to additional ATH’s on August 1. This followed better-than-expected quarterly results and bullishly occurred on huge volume. Over the past two months, the stock has based between $110 and $120, working off the daily overbought momentum condition. The stock recently undercut its 50-day average at $115, so it will be important to retake this average. According to Investors.com, YUM has high Relative Strength (RS) and Group RS ratings.

We would put a stop-loss just below support of $108. We would take profits in the $130/$135 area once the shares break through $120.

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