A Rally Without Reason

You know what's missing from this market? A narrative -- at least one that the fundamental folks can glom onto.

Often we get a lift off the lows, and it's because the Fed took its foot off the brakes. Or some economic number came in higher or lower than expected. Or earnings were better than expected. Or margins. But in the last nearly two weeks, since this rally started, none of those things has changed.

Rates are still high and the Fed is still hiking, although bonds have stabilized. Inflation hasn't changed, either. And it's not as though those reporting earnings have had great earnings and outlooks and their stocks have soared. And it's hard to forget there is still a war going on in Eastern Europe. So nothing has changed, has it?

That means the fundamentalists who a week ago were baffled by the rally are still baffled. They still have no narrative to hang their hats on. That's probably why the sentiment feels like it is shifting like quicksand.

The day traders at the American Association of Individual Investors (AAII) did however shift. Bulls jumped about 10 points and bears fell nearly 15.

The National Association of Active Investment Managers have barely lifted their exposure, which is quite unusual. They were down to 32 two weeks ago and are now at 52.

But we do see the shift, albeit a minor one, in the put/call ratios. The first two days of the rally saw readings over 1.0. This week they have spent most of the week in the 80s, which I consider neutral. If we look at the 10-day moving average we can see that since the peak in late January at 1.05 it is now around .93. If we get a few more days of readings in the mid 80s this will be kissing .85 midweek next week. That is not an extreme, but look at the chart and you can see the embracing of a rally is often much swifter than it has been this time (the chart falls fast as stocks rally).

I grant you there has been a lot of churning on the charts this week. For example, the Russell 2000 is actually down on the week. If we look at the chart of Russell fund (IWM) , we can see that if IWM can get going this will look like a consolidation, although resistance at $210 is heavy. We care about this chart, because if it can't get going, then breadth will turn sour and sour breadth will have a knock-on effect on the indicators.

For now the McClellan Summation Index is still rising and it would still require a net negative of about 3,500 on the New York Stock Exchange (advancers minus decliners) to halt the rise, so it's not in imminent danger of doing so. But it needs to be watched, especially if the Russell can't get going.

The Oscillator will be back to an overbought condition early next week, so it would be best if it can get going before then.