Assessing the Giddiness Factor
Typically, when CNBC decides to do a special report it's about "Markets in Turmoil" and we are at or near a low. Yet on Thursday night, it decided to do a special report about the market at a new high. Some folks want to know if we should take this as a sign that the market is too giddy.
The market is somewhat giddy. As I indicated early in the morning the American Association of Individual Investors showed there are now less than 20% bears. That is pretty extreme and rarely do we see the reading get under that. Yet, curiously enough, the peak in the market often comes a few weeks after that low reading. It is not coincident.
If you would like a sentiment indicator to hang your hat on that says maybe folks are too giddy, then there is the put/call ratio on the VIX, which soared to 173% on Thursday. We have not seen a reading that high since the spring of 2012. Remember this is folks buying 1.73 puts for every call purchased for the VIX, which means it's a hefty bet that the VIX will go lower not higher. If we are to take the contrary angle on this statistic then we'd have to think all those put buyers are wrong and the VIX should rise. A higher VIX is often accompanied by a lower stock market.
What strikes me is that there are plenty of divergences that exist on the NYSE. The number of stocks making new highs increased from earlier in the week but are still far below the May peak reading. Cumulative breadth is not even close to making a higher high. Cumulative volume is even farther away. While not a divergence, the Oscillator is overbought as well.
None of those negative divergences exists on Nasdaq though. New highs increased. Cumulative Volume made a higher high along with the Index and while Overbought, the Oscillator made a higher high.
The intermediate-term indicators are all still in oversold territory. Do not be shocked by this. Recall, we only got intermediate-term oversold the first week of July. The 30-day moving average of the advance/decline line shows we won't get overbought until sometime in August. The McClellan Summation Index is still rising and now it has such a massive cushion that it screams short-term overbought, but the underlying trend is up.
In addition, we finally got a completion of the head-and-shoulders bottom in the Utes.
If you would like to fret over something, then complain about the banks, which have underperformed the market for four days in a row now. Of course, in this market that likely means on Friday they will rally their little hearts out. But that has been a laggard group this week.
For my part, I am surprised we could rally so strongly with the market so overbought. I had thought it would be more of a choppy market, but I'll stick with the view that we should back off or chop around and then rally again.