STRATEGIES

Good investors should never chase prices, but the markets do seem to be at a point where any solid pullbacks could be buying opportunities. Watch closely, and keep your cash ready for openings in any of the picks recommended by MoneyShow’s Tom Aspray.

As the markets head into the news-laden weekend, the bulls seem to be taking the upper hand over the bears, as the markets closed strong. Of course, many are on the sidelines until after Sunday’s Greek elections, and the quadruple expiration of futures and options on Friday also keeps many out of the market.

Certainly the news on the economy last week was more negative, with some now looking for second-quarter GDP growth to be below 2%. The increase in jobless claims and the lower than expected Retail Sales and Industrial Production numbers did not help.

Two weeks ago in "Armageddon Fears Are Overblown," it was my view that the negative sentiment was overdone. Too many seemed to be preparing for an economic meltdown. The major averages made their lows the following Monday, and the recent rally has reduced some of the anxiety.

But the question remains: Is there enough pessimism for stocks to begin a major new uptrend?

Overall, the evidence seems mixed. June’s mid-month reading on consumer confidence, released last Friday, dropped sharply to 74.1. This was in sharp contrast to the final May reading of 79.3. The reading was well below the consensus forecasts, and it appears that the sharp drop in gasoline prices has not yet encouraged the consumer.

The consumer sentiment seems to be negative enough to support a low in stocks, and after the Facebook (FB) debacle, the public interest in the stock market seems to be low. The data also suggest that those who are investing seem to be quite worried.

Veteran market analyst and option expert Larry McMillan noted last Thursday that “a very powerful buy signal associated with the total put-call ratio is about to engage.” Mathematically, it will turn positive with Monday’s close.

A high level of put volume indicates a high level of bearish sentiment. (Larry is an old friend who does excellent work, so option traders should take a look)

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The VIX has spiked above the 27 level three different times since May. This indicates that option premiums are reflecting a high level of fear. As the chart indicates, a drop below the converging support in the 21 area (lines a and b) would be consistent with a market bottom.

Other typical measures of market sentiment, such as the AAII reading on the individual investor and the sentiment of financial newsletter writers have not reached levels normally associated with a market bottom.

The AAII reading jumped from 27.4% bullish to just over 34% this week. Just over 37% of the newsletter writers are bullish, up from last week’s reading of 34%. Only 26.2% are bearish, as opposed to over 46% last fall.

Looking at global sentiment, the evidence is more consistent with a market bottom, as the European Commissions economic sentiment index has dropped to the lowest level since October 2009.

Chart: Coming to America - Foreign district investment in the U.S.

It is interesting to note that there has been a sharp pickup in foreign investment in the US. A total of $28.7 billion in direct foreign investment was reported between January and March.

As the chart indicates, there was $234 billion in foreign investment in 2011, and it has risen for the past three years. Overseas buying of US real estate has been reported to be high over the past few months.

The markets this week will be focusing on the events in the Eurozone and the FOMC meeting on Tuesday and Wednesday. Of course, investors are hoping that the economic news is bad enough to spur action by the Fed, and as a result those on the short side are justifiably nervous. Recent data suggests the big banks are a favorite target of the shorts, and as I noted Friday, the shorts could get squeezed.

This week, there is a slew of housing data. As I discussed in my most recent Trading Lesson, there are signs the homebuilding stocks are close to ending their correction. Monday, we get the Housing Market Index, followed by housing starts on Tuesday.

Then, on Wednesday afternoon, we get the widely anticipated FOMC meeting announcement, followed by Ben Bernanke’s press conference. Thursday follows with the latest numbers on jobless claims, existing home sales, and the Philadelphia Fed survey.

NEXT: What to Watch

Tickers Mentioned: SPY, DIA, QQQ, IWM, IYT