Bulls Don't Back Down

I'm not surprised by the pullback, but here's what does surprise me. Let's check sentiment, energy, and a chart from a decade ago.

Author:
Helene Meisler
Publish date:
Dec 7, 2023 6:00 AM EST

Comments

Obviously the pullback thus far this week is no surprise to me, since I have said for well over a week now that I expected a pullback in early December. What is a surprise to me is sentiment. It feels as if it has barely flinched from all the bullishness.

Let's begin with the Investors Intelligence bulls which stayed the same at 55%. Bears barely budged, either, so this sentiment indicator remains elevated (too many bulls).

It remains to be seen what the day traders at the American Association of Active Investors will do when their survey is released on Thursday morning, but if the options traders are any indication, we've seen no increase in bearishness.

For nearly all of November, as stocks were rising, the put/call ratios remained elevated for the most part. But in the last two weeks -- essentially as the market has flattened out -- the call buying has picked up. For example in the last week or so we've seen the equity put/call ratio in the 50s for five of the last six trading days. The total put/call ratio has had one reading over .90 in the last six trading days and that reading was .91. Heading into Thanksgiving we couldn't get this ratio under 1.0. That's a change.

But the real change for me is in the ISE call/put ratio. For starters, the ISE Equity only ratio has been over 2.0 for three-straight days. The last time we saw that was February of 2015. What followed was a fast 4% whack in the S&P 500.

But let's take a closer look at the ISE call/put (total) ratio's 21-day moving average. It is now at 1.27 the highest since February 2021. As a reminder in February 2021, we had a major peak in the market, when the majority of stocks made their highs for the bull market. Biotech peaked, special purpose acquisition companies peaked, and small-cap tech peaked.

If we get over that peak, we will be looking at the peak (at 1.40) in late December 2013 as the prior peak. The year 2013 was an excellent one in the market so let's take a look at how the year ended and how it began as we entered 2014.

We had a choppy to down early part of the month and then we zoomed upward into year end (seasonality folks will like that!). But look at 2014: We went sideways for two or three weeks and then a very fast down 5% in two weeks.

I expect the International Securities Exchange's moving average to turn down later this week, but quite frankly it shocks me that after three down days, even if they are mild down days, it is still elevated. In sum, sentiment is not backing off and I don't view that as a positive overall.

You know where sentiment has changed though? Oil.

The Daily Sentiment Indicator (DSI) is now 16. It was over 90 a few months ago when everyone was calling for $100 oil. Now I hear calls for $60. Sometimes a reading in the teens is enough to get a rally. Sometimes it needs to get to single digits but I'd say we're very close to a rally in energy.