Pause is Inevitable as We're Overbought With Sentiment Extremes
The Market
We are at the point in the rally where the S&P 500 and Nasdaq have only had two or three down days in nearly a month while the S&P 500 has had seven straight up days and Nasdaq has had 10. So, of course we’re overbought. We’re also at the point where we’ve had some sentiment extremes, so naturally it feels like a pause is inevitable.
I do expect a bout of volatility. Why? Last week we saw the Daily Sentiment Index for the CBOE Volatility Index fall to single digits. That is incredibly rare. We also saw Nasdaq and the S&P get over 90 on the DSI. If that wasn’t enough we saw three days with the equity put/call ratio in the 30s.
The slower moving put/call ratio moving average lines are getting extreme but they still have some room to fall further. Just look at the 21-day moving average of the put/call ratio for ETFs because it is not yet extreme, although with so many readings under 1.0 this last week I expect it will move to extreme in the next week.
I can even note that the Investors Intelligence bulls are at 54%, which is a far cry from the 40% they were at the lows, but they are not yet at 60% although I expect we will see them at least in the upper 50%-range this week. If that happens then this would be knocking on the door of extreme as well.
The National Association of Active Investment Managers’ Exposure Index has chimed in at 108, also now extreme. The last time it was at these lofty levels was in January and February.
Yet the number of stocks making new highs has increased. Breadth has at times stalled but has not been bearish as it continues to make new highs. The McClellan Summation Index continues on its upward path with a decent cushion, meaning a few down days should be manageable. If that changes and breadth turns sour, that would be a mixture for a negative market since sentiment is so bullish already. But for now, a shakeout or bout of volatility seems in order, but that’s it.
I would note though that as much as I loved the Transports in late September, I am not thrilled with them now. First, that nonsense last week when almost all the names were down but Avis (CAR:Nasdaq) was on the move is, well, nonsense. It also took the Transports up to 18,000 which was a measured target. The Russell 2000 has a measured target in the 2,500-2,550 zone. And the S&P has one in the 4,700-4,750 area. Finally note that the VIX is now well off the lows. A little volatility will show us where the strength is because under the surface there are still shifts taking place. For example, banks have been weak, and energy has stalled. Software seems to have stalled and is vulnerable as well. The one group I will be focused on this week is industrials, since they are breaking out, and the infrastructure bill has passed. Do they continue or do they sell the news?
New Ideas
Someone asked me if there is a head and shoulders bottom in the VanEck Vectors Gold Miners (GDX) , an exchange-traded fund to be long gold stocks. There is. But keep in mind that even crossing $34, the neckline doesn’t clear it. The real clearance wouldn’t arrive until it was over $35 and change. I have thought the SPDR Gold Shares (GLD) , an ETF to be long gold, has been okay since it was around $164 back in September (before it plunged to $161!). I would remind you that $171-$172 has been stiff resistance since June so it still needs to clear that to get going.
Sticking with the precious metals theme, I would offer a reminder that two weeks ago I drew in the potential head and shoulders bottom in the iShares Silver Trust (SLV), an ETF to be long silver. It looks very similar to GDX in that a move over the neckline at $23 doesn’t clear it but it helps move it in the upward direction.
Today’s Indicator
The number of stocks making new highs has continued upward, which is a plus although the New York Stock Exchange continues to lag.
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Square (SQ) had a real chance to breakout last summer and failed to do so. Now it is in danger of breaking an uptrend line. There is support all the way down to $200, so breaking the uptrend line isn’t dire. I suppose if it holds $230 and starts to just go sideways for a time perhaps the move from the August high looks more corrective than bearish. It just looks like a stock that is going nowhere, trapped between $200 and $280 with a slight negative bias.
MicroStrategy (MSTR:Nasdaq) has a nice base that has formed. It’s not a clear breakout over $850 because there is a spike high at $900, but in general, it looks like a base has formed. If it cracks back under $700, I’d get concerned that it is not ready to rally and instead will stay in the very wide range it has been in since March.
Every crappy retailer soared last week, even American Eagle Outfitters (AEO) rallied but got stopped right at resistance. I suppose if it can hang on here at the $26-ish level then rally again it can fill that gap around $30.
AutoNation (AN) is a stock in an uptrend and as long as it stays over $115 that should be the case. There is a measured target around $145, as long as it can stay over $115.
