As the Great Unwind Continues, What Does It Mean for Sentiment?
Is it short-covering? Does it matter? What matters are the indicators and what they say about the market's next steps.
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The Great Unwind continues. I have seen some folks complaining that this is all short-covering. Okay. So? If the others went up and we made money, why do we care if it was short-covering or new longs?
Sure, I’ve heard that short-covering is worse because when the shorts are done, we can head back down. Isn’t the same true for longs? If they get antsy, they can sell. I know it’s not the same, but it’s not that different.
The bank love was off the charts on Tuesday. I won’t beat a dead horse, but I will remind you that the measured target (and previous highs) for the Bank Index is 115 and this index closed a smidge under 114. I do not expect a major retreat from here, but I do believe they are now over-loved and unlikely to keep on firing away from here. There ought to be several tries to break through this resistance/target area, but in general we’ve had a good run.
Bonds are trying their hardest to break through, but it’s still touch and go in my view. I like breakouts I can see with my bad eyes, not ones where I must squint and get the magnifying glass to see if it is so.
The McClellan Summation Index is in full swing to the upside which means the majority of stocks are heading up (you did not need me to tell you this!). However it now needs a net differential of -4000 advancers minus decliners on the NYSE to halt the rise. That makes it short term overbought.
Yet we are not intermediate term overbought. My expectation is that we will get to an intermediate term overbought condition around the end of July. That’s when I foresee the 30 day moving average of the advance/decline line getting overbought. The Volume Indicator is at 52% (up from the oversold reading of 46% in early July). It gets overbought in the mid to upper 50s so it still has some room to move. I do expect we will see a short term pullback before then though.
The number of stocks making new highs finally improved. The NYSE had more than 400 new highs. It’s still not more than we saw last spring but it’s a marked increase.
As I said on Monday I expect we will see the sentiment indicators notch up from complacent to giddy in the next few weeks. We will get our first fresh readings midweek on this but my expectation is that we should see ‘giddy’ right around the time we get intermediate term overbought.
For example the put/call ratio finally fell under .80 on Tuesday. In this entire run from the April lows we have only seen a handful of readings under .80 so this is a start. And while I am not a fan of the CNN Fear and Greed Index, it has pushed into Greed whereas one week ago it was at Neutral. You can track it here. https://www.cnn.com/markets/fear-and-greed
