A Lesson in Market Sentiment: Consider Whose Party Is Bigger, Bulls or Bears?

Okay, I’ll call it a whoosh. That’s what I think we got on Fed Day.

But do I think we got any change in sentiment? I do. Was it a big change? No, it wasn’t. I mean, how can you call it a major change in sentiment when Nasdaq closes down a mere three points and the S&P rallies 35 points into the bell?

It’s been quite some time since I have discussed my views on sentiment. It tends to happen slowly and then all at once. Meaning, imagine the bulls and bears are neighbors with a fence between. As the market rallies, the bulls are partying wildly while the bears look on forlornly.

Slowly, the bears mosey over to the fence, some jump over to party with the bulls. At the highs nearly all the bears have jumped the fence and are yucking it up in the bulls’ backyard.

Right now, we have the bears enjoying themselves, having a few cocktails, but they do not have much company. The bulls have moseyed to the fence; some have grudgingly climbed over, but the bear party is not yet enticing enough for them to jump the fence.

We can see that anecdotally. A well-known strategist took his year-end target for the S&P down from 8400 to 7900 on Wednesday. Okay, that’s a change; he has scaled the fence.

The put/call ratio pushed up to .96 on Wednesday. That is the highest reading since we got to 1.05 in late July. So you can see that a few of those bears have pushed into the bears’ backyard.

The Investors’ Intelligence bulls notched down to 48%, which isn’t much considering the bears notched down a smidge as well, leaving the ratio of bulls to bears at 2.88. Let’s say a few of them are now at least looking over toward the fence.

The DSI for the S&P has gone from 79 in early August to 40 now. Here, too, we can say the bulls are pushing toward the fence. I sense if we don’t have a good bounce in the next day or so, we will see a lot of jumping the fence this weekend. I can see it anecdotally.

So we have a market that is quite oversold—notice the Overbought/Oversold Oscillators ticked up on Wednesday. But still can’t rally. And maybe that’s why Nasdaq didn’t see much selling.

The number of stocks making new lows did not expand on Wednesday (vs. Tuesday). A contraction in stocks making new lows while the S&P makes a lower low is a plus.

On an intermediate-term basis, the Volume Indicator is into oversold territory as it is now just under 47%. Can it get more oversold? It sure can. But this is the first intermediate-term indicator showing an oversold condition since last spring.

Finally, let’s talk about the Bank Index. On Wednesday, the banks finally broke, and folks finally noticed how weak they have been.  There is a short-term measured target on the Bank Index around 175, but look at all that resistance it has left overhead now.