Technical analyst: It's not a bear market yet, though it's too early for aggressive buying

Tom Aspray, a technical analyst and contributor to Forbes, used the chart below to demonstrate what some important lows in the market dating back to 2010 had in common, viz, - active bearish sentiment. 

The short-term lows were marked by some unsettling headlines. Perhaps the same is going on these days?

Have a look.

In May 2010 an Economist article highlighted some of the market’s concerns as they said "Fears are growing that the global recovery will falter as Europe’s debt crisis spreads, China’s property bubble bursts and America’s stimulus-fuelled rebound peters out."

In June 2010 Paul Krugman warned that policy makers concern over inflation could cause "The Third Depression" as he felt that deflation was the real threat.

By August this was a more common view as noted in in the WSJ “Big Investors Fear Deflation”. This coincided with multiple low readings (20-22%) in the AAII bullish individual investor sentiment. The stock market decline ended in early September as the NYSE A/D line completed its bottom formation.

Thus, at the end of 2015 economists can make a conclusion that this market collapse was caused by fears of a September rate hike that ultimately did or did not happen, Aspray says.

"If the next multiple week market rally is not impressive, analysts may point to the current complacency as a warning for the market going into 2016."

The author also notes that "the narrowing ranges in the stock market over the past two weeks and the fact that it did not collapse last week appears to have soothed some investors.” Meanwhile, fund outflows in August were only half of what they were in July.

Aspray says he doesn’t see a new bear market but believes it is “too early to be an aggressive buyer as bottom fishers are likely to get burned even though the risk was diminished.”

He warns traders against falling for some of the short-term positive signals from momentum studies that some analysts are banking on. "Having used the MACD and RSI for over 33 years these short term signals only result in short term rallies not sustainable market bottoms."

Plenty of stocks and industry groups are now emerging as new market leaders. They are likely to continue to outperform the S&P 500 once there are vivid signs that the market has bottomed.