The Pattern Sticks

Monday's market kept the "first of the month" pattern alive.

By that I don't just mean another up day in the market, I mean a day where breadth is very good. It's been that way throughout 2021, where the first or second day of the new month brings in a terrific breadth day.

That means the McClellan Summation Index is still rising. We came into the week where it would have required a net differential of negative 600 (advancers minus decliners on the New York Stock Exchange) to halt the rise. We enter Tuesday with that number at negative 1,800. That is a decent cushion. I consider anything that is quadruple digits a decent cushion. So as long as breadth doesn't weaken to be worse than that the indicator is still rising. This indicator tells us what the majority of stocks are doing so if it's rising, so are most stocks.

But there was another development. While the number of stocks making new highs on the NYSE was a bit fewer than last week, it was a smidgen over 200. So, we'll call that a partial positive. And I'm only giving it the benefit of the doubt, because Nasdaq's new highs topped 300 for the first time since May.

Just in case you thought the either/or market was gone, it remains with us. Last week it was mega-cap tech that rallied at the expense of everything else and Monday mega-cap tech sat it out, which allowed everything else to rally. And that brings us to the chart of the Russell 2000 fund (IWM) .

I have thought that the Russell would make a stab at the old highs and maybe even break out. But, my gosh, my antenna rose when all of a sudden the whole world saw the chart. Keep in mind the Russell is already up nearly 4% since Wednesday's close.

So, yes, the sentiment is bothersome to me, but as I have noted for a month or more, as long as breadth is good, sentiment can be bullish. The problem arises when we have too many bulls and poor breadth.

I would, however, note that the Volatility Index was green on Monday. The Daily Sentiment Index (DSI) therefore only ticked down marginally to 13. Nasdaq's DSI remained at 87 and the S&P moved up a touch to 83. They are all still within shooting distance of getting extreme in the next few days. Extremes are over 90 or in the single digits. And an extreme reading in this very short term, very sensitive sentiment indicator, coupled with last week's equity put/call ratio reading under .40 would have me thinking we're due for a bout of volatility.

Note: I am taking off the remainder of the week to go celebrate my mother's 85th birthday with her. With any luck we'll get some market pearls from her! My next column will be Nov. 8.