It's Still 2020, so, of Course We're Still Going to Extremes

The Market

All we got was some chop in the final two trading days of the week last week. We also got something we haven’t seen in the last few weeks: Nasdaq big caps woke up.

We’ll begin, however, with sentiment, because I am hard pressed to come up with one indicator that is not at an extreme. Let me list where the sentiment indicators stand: The Daily Sentiment Index (DSI) for the Volatility Index reached nine late last week. Single digit readings are often a reason to be contrary, thus we should look for a VIX move up in the coming days. This is a very short-term indicator.

The CNN Fear and Greed Index reached 92 on Friday. It got to the upper 90s in January, so I suppose there is room to run, but over 90 is pretty extreme. My own Saturday Twitter poll has flipped. Last week we saw 46% looking for upside while 54% were on the downside. This week it has flipped to 54% up and 46% down.

The American Association of Individual Investors saw the bulls back off, but two weeks ago they too were at their highest level since January 2018. The AAII Bears, where I like to watch the four week moving average, is not yet extreme, but in the last few weeks it has gone from 45% to 28%.

The NAAIM Exposure Index finds folks "over exposed" at around 106. The Citigroup Panic/Euphoria Index is back to the late August levels, as well.

The Investors Intelligence Bulls finally crossed the 60% mark and made it to 64%. They don’t get to these lofty levels often. The bulls were last here in the final months of 2017 as we headed into the tax cuts. They stayed over 60% for more than two months. The blue arrow represents that time frame. You can see the S&P corrected about 2% in the ensuing weeks and then lifted 10% with a few minor corrections along the way.

The McClellan Summation Index was on the rise then (as it is now). Notice it peaked in mid-January, two weeks before that big decline in late January. It gave us fair warning.

We also saw readings this high in early 2017 (blue arrow). The Summation Index was also rising. It’s hard to see on the chart, but the Summation Index peaked the third week of February, so that last gasp up in early March had no confirmation from that indicator. You can see the S&P then corrected about 3%, which was enough to take the bulls all the way back to 49%.

In the past few days, breadth cooled off a bit, not a lot, just a bit. The Summation Index is still rising and would need some pretty weak breadth readings to soften it up. Should the big cap tech stocks take the mantle at the expense of everything else we would have a situation with deteriorating breadth and extreme sentiment.

The iShares 20-Plus Year Treasury Bond fund (TLT:Nasdaq) has been under this line for three months now. If the line cracks to the upside (I think it is likely) then it would be a change from the last few months, which could then favor big-cap tech. So that’s what I have my eye on for the week.

I expect a quick bout of volatility would shake out some weak hands.

I will end by noting the DSI for gold is now at 17.

New Ideas

I was asked to follow up on Nutrien (NTR) , which I recommended about a month ago. It’s had quite a run so in my estimation it needs a rest or a pullback. With very little support close by it’s hard to know where I would buy it again. Longer term there is a measured target in the mid-$50 area.

We looked at the Utes last week and got quite a nice pullback in them. There is probably more work to be done when it comes to them, but my old friend Southern Co. (SO) gets interesting to me around $60. I’d prefer to see it back at $58, but anywhere in this $58-$60 zone I warm up to it again.

Today’s indicator

The new highs have not increased beyond that peak reading in early November.

Q&A/Reader’s Feedback

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I am still a fan of Lumentum Holdings (LITE:Nasdaq), but in the immediate future, I think it is stuck in this range between $80 and $90. If it could map out something akin to what I’ve drawn in blue, I would feel more confident that the spike to $92 earlier in the month could be overcome.

I cannot recall the last time I was asked about FireEye (FEYE:Nasdaq), because it has been such a disappointing stock over the years. If it can get over $16, I’d be impressed and I wouldn’t be surprised if it does it. What might surprise me is if it can do more than give us a big spike up, suck us all in and then stay over $16.

I continue to be a fan of Pfizer (PFE) longer term. The spike high at $40 is problematic in the short term, but longer term it measures into the low $40s.