A Change in Sentiment Would Help. Here’s Why.
Sentiment is deeply important to how the market performs. Right now, sentiment remains more complacent than I would like.
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Just in case you thought the Either/Or Market was gone, I am here to report that the S&P tacked on 44 points while breadth was flat. So, all that hootin’ and hollerin’ about the great breadth on Tuesday had zero follow through as soon as tech rallied. I wish it wasn’t that way but that’s the market we have.
We had a decent shift in the Investors’ Intelligence Bulls this week as they fell from 56% to 49% but it’s not enough to write home about. But you see the bears stayed put (at 16%) as everyone jumped into the ‘correction camp’.
Let me address why I want to see a big change in sentiment. Minor changes in sentiment keep the runway for the market short. It keeps the Either/Or Market alive. There is no real cleanout. Notice how the bulls got down to 33% in March. And look at the rally we got from that oversold condition. It lasted more than two months.
In mid-September when bulls fell to 48%, we got a rally in tech stocks but it lasted two weeks before that was over and down we went. For example, the Daily Sentiment Indicator (DSI) for the VIX is now at 15. Between 10 and 15 and I see a yellow flashing light. Under 10 and the VIX is a screaming buy. So, with the DSI at 15, how long do you think the runway is for an oversold rally? The math says not long.
We are still oversold in tech-land, so even if tech stocks back off on Thursday I would look for them to rally again but the best set up is when we get folks bearish and we’re oversold. The Overbought/Oversold Oscillator finally lifted and showed a bit of life.
For those asking on the SMH, an ETF to be long the semis, my guess is even my mother sees the 540 support level. I show resistance in the 590 area (blue line). If we saw the semis turn south and break 540, I think we’d get some panic/bearishness as we did in late July. Barring that sort of action we’re likely just in this sloshing back and forth zone.
It’s time to revisit the Utes. The Utes have run into a wall of resistance (black line) and, anecdotally, I see some folks I would describe as ‘late,’ all of a sudden, in the last few days, quite proud because they just bought a utility stock. I think it would be great if the Utes had a shakeout. I have drawn in blue what would, if it were to occur, look like a head and shoulders bottom. I would not be surprised to see the Utes giving back some of the recent rally.
