Stocks Were Due for an Oversold Bounce. Was That It?
The question is, will we get more of a bounce than we saw on Thursday?
You've reached your free article limit
You've read 0 of 1 free Pro articles.
Did markets jump the gun by not waiting until next week to rally? Maybe. I would not rule that out. I would also not rule out that we get some give back in the next day or so. But that wouldn’t change my view that we are still due an oversold rally next week.
I have said several times that I view this current period similar to what we saw last fall (red box) when it comes to the Overbought/Oversold Oscillator. There was a lot of up and down with the Oscillator flipping back and forth very quickly between overbought and oversold.
Sentiment had been trending toward the bearish side all week. I don’t think it got terribly extreme, but we saw it in the put/call ratio where four straight days saw this metric over .90. Even Thursday’s rally saw the put/call ratio at .85, which is still elevated for such a big up day. The moving averages, though, say this should not be viewed similarly to the oversold condition in late March, because in late March, the ten-day moving average was at the top of the page, and now it has only just lifted off the bottom
The AAII bears, however, came out of hibernation in a big way, with the bears chiming in at 47.7%. The bulls were low as well at 30%, but that’s not as noteworthy as the bears.
The NAAIM folks who were practically on margin two weeks ago with their exposure at 98 now have their exposure back at a more moderate 78, the same place that they got to in mid-May.
Again, none of this is extreme, but it is probably enough to get an oversold bounce.
I do, however, want to revisit the chart of the software ETF IGV. A few weeks ago, we checked in on it, and once again, I paired it up with the chart of the Mamis Sentiment Cycle. I thought at the time we were in the portion where it says Anxiety on the chart.
At the time, I had thought IGV could rally to the 100 area. So naturally it proved me wrong and soared to 108. But the pattern is still intact. I think it is possible we are now into the ‘aversion’ leg of the pattern.
There is some support in the 87 area. My guess is there is a bounce from there (next week’s oversold rally), and then it comes down again, perhaps a pattern (not necessarily the exact levels I have drawn in) similar to what I have drawn in blue.
The market in general feels like the only stocks people want to buy and hold are semis, and everything else is just a rental or a big round of short covering. So, what we are witnessing in the software stocks now, I believe, is the unwinding of that last gasp of shorts covering up at 108.
