The Question Is, Will Breadth Join Price at New Highs?
While the talking heads yammer about animal spirits, the number of new lows on the Naz gets concerning. At least the bonds had a good day.
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I find sentiment fascinating. Last Thursday, you might recall the market took a spill, with the S&P down 108 points on the day. Nasdaq lost 500!
Breadth had been weak for weeks at that point. I had been pointing it out to you. Yet it was as if all the bulls woke up and discovered weak breadth that day. Yet it is weak breadth that gets us to an oversold condition as my Overbought/Oversold Oscillator showed as we entered this week.
Fast forward to Thursday when the word/phrase of the day on television is ‘animal spirits’ as if the market is not already at the highs and we haven’t had animal spirits all year. This is far different than what we saw after the last two presidential elections because those both saw the market start from a decent low with serious bearish sentiment. I don’t call a 2-3% pullback on the S&P a decent low with super bearish sentiment.
We’ll get back to sentiment in a minute but let’s talk breadth first. It was okay, not great on Thursday. I am still waiting for breadth to make a new high and join the S&P. Thus far, it has refused to do so.
Why am I waiting? Well, the Oscillator, while it is over the zero line now, is not yet overbought so I give it time to get overbought, and therefore time for the breadth to improve.
The number of stocks making new highs fell off a cliff on Thursday, with both the NYSE and Nasdaq chiming in with more than 200 fewer new highs than the day prior. The number of new lows on the NYSE finally contracted to a decent level at 16. Nasdaq, however, still has new lows over 100. The last seven trading days have seen Nasdaq new lows over 100. For a market at new highs, that’s concerning.
But the bonds finally rallied! Let’s see if they can have some follow-through. There hasn’t been a lot of follow-through lately, so color me cautiously optimistic they can tack on another day, especially since the Utes did not rally the last two days. All they have done is stabilize.
Now, back to sentiment. The put/call ratio has come down to .83. That is not extreme; it just shows folks are getting more comfortable with the market. The ten-day moving average of the put/call ratio has hardly budged and continues to reside at .99.
The Daily Sentiment Index (DSI) for the S&P is now at 82, and Nasdaq is at 83. A reading over 85 means we step a toe into the yellow flag zone. Over 90, and it’s a red flag. Again, you can see the difference between starting a rally from a strong oversold condition that has bearish sentiment from one that starts from a merely cautious view of the market. The first takes a long time to get to giddy. The latter has a much shorter runway to get there.
Then, there is the DSI for the VIX. It is now at 10. That is a red zone, or bordering on one. Single-digit readings are solidly red. If the S&P gets to 6000, and the DSI’s for the indexes get over 85, and the VIX DSI gets to a hat size at the same time we get overbought, then we’ll have to fret over the animal spirits.
