The Rubber Band Didn't Snap, But the Unwind Was Violent
After 15 up days in a row for Nasdaq up volume, something had to give.
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The Great Unwind.
Let’s review the last few months in the market. In May, we returned to the meme stocks with all sorts of nonsense that is associated with it. Then, we embarked on a months long period of the 493/others being sold or left for dead while the Index Movers/Mega Cap stocks rallied onward and upward. It was one of the worst Either/Or markets we had seen.
But folks were not concerned; sentiment levels were highly complacent. But this positioning kept going, to the point where the rubber band got so stretched, it was either going to snap or un-stretch. It opted to un-stretch and it did so violently.
However, the violent part was mostly the unwind for the 493/others as folks scrambled to cover shorts or get long. But up until Wednesday there was very little action in the Mega Cap names. They sort of just sat there or drooped. Wednesday, they gapped down and got sold; some got sold quite hard.
The change is seen clearly in the fact that Wednesday saw the net volume (up minus down) on Nasdaq negative for the first time since June 24th. The boat was just too loaded to one side. Imagine fifteen straight trading days—three weeks!—with the market moving in the same direction without a break. Wednesday was a big change in that pattern.
So when I discuss an unwind, that’s what I am talking about. It’s two sides, and the others had their unwind and now the Favored Few are having theirs. I always prefer when the others rally over the few but as I said last week, the healthiest markets have both, not one or the other.
Last week, I drew in this line on the chart of the S&P. I also did the math that said there was a measured target of 5650 on the S&P. it is my view that backing off from here is part of the unwind. So even if the S&P rallies again I still think that this line will keep it in check until we get a correction we can see without the help of a magnifying glass.
In the meantime breadth was moderately lower on Wednesday which means the indicators haven’t changed. My premise has been that we should get intermediate term overbought near the end of July and by then sentiment will be leaning giddy. With the action in the Index movers that might not happen but the Investors Intelligence bulls ticked up to 63% while the bears ticked down a point.
This leaves the Bull/Bear ratio at 3.81. It’s clear that a ratio such as this leans high but one that tags 4.0 is a recipe for a correction.
The bottom line is I don’t think the others are done rallying yet. I do think most of the violence of the unwind is behind us. Now it probably gets more choppy.
