Things Are Getting Tricky

The Market

Now that was an oversold rally.

And we more than filled the gap and are now into the first resistance area. This means it gets harder for me going forward.

You see, I still believe that after the oversold rally, we should come back down again, but knowing when that oversold rally is completed is the hard part. I can make the case for a pullback for a day or two, but I can’t make the case that we’re back to an overbought reading yet.

I can make the case that the 50-day moving average resistance is right here, but when the 50-day moving average is still rising – and it is -- the resistance isn’t terribly formidable.

Breadth was terrific; in fact it was the best it has been since Jan. 4. And I don’t get the sense that Thursday’s rally changed many minds. I get the sense it’s more of a relief to folks. Generally speaking, it’s easier to come back down when complacency is back in vogue.

Speaking of sentiment, the American Association of Individual Investors’ (AAII) weekly survey was eye opening. The bulls plunged by nearly 17 points and the bears soared by 24. That’s a ton. Unlike the Investors Intelligence weekly poll we looked at the other day, it is far more common for the AAII to jump around, but even this is big for them.

Just look at the jump in bears; they were last this high in late December.

But I did go back and look at the prior times that the bulls dropped by similar amounts and discovered that -- similar to the II exercise we did the other day – we often came back down.

In 2009 there was such a move in mid-January, when bulls collapsed by 21 points. We did bounce a bit, but then we plunged into the March low. So, they were right to pull in their horns. Then in August 2009 they turned tail pretty quickly and we rallied for a few more days and came back down two weeks later.

In 2010 they turned tail in November, after a quick move down. We rallied and came back two weeks later. That’s the blue arrow. They were dead wrong to pull in their horns on the final day of 2010, but that might have been a holiday thing, since we never know how many actually vote anyway. But rather than rationalize the indicator, they were wrong since we did not come back down.

In 2013, it appears their timing was perfect for a quick drop as they pulled in their horns in mid-April just before the S&P pulled by around 4%.

There is one indicator that I must highlight, though. Remember when the put/call ratio for the Volatility Index was under 20% for four-straight days and I harped away? Well it zoomed up to 119% Thursday, which means far too many are now betting on more downside in the VIX. The last time it did that was July 10. We did get some more upside in stocks, but not a lot of downside in the VIX.

So I am going to stick with my call that we should come back down again. The next few days are a coin toss to me. Should we come down in the next few days my own Oscillator will be right back to an oversold condition midweek next week so it seems too soon to think the ‘back down’ is imminent. But I’ll admit that high put/call ratio for the VIX has me concerned.

New Ideas

PayPal (PYPL:Nasdaq) should have rallied better Thursday, and it didn’t. It also made a lower low this week vs. the May decline. If it cannot recapture that line in a hurry it’s a problem.

Several have inquired about Philip Morris (PM) , a stock I like. Sure, it came down more than the gap fill, but if we use a thicker pencil, it is bouncing off that line. I would like to see it curl under or form a W pattern, but I am still a fan.

Today’s Indicator

The 10-day moving average of the put/call ratio is finally climbing, which is what it needs to do to get us to an intermediate-term “oversold” in this indicator.

Q&A/Reader’s Feedback

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I was asked to update my old friend Survey Monkey (SVMK:Nasdaq), because it got to – almost – $20, which was the first target, and sort of died. But I think this is just backing and filling and of course, the stock is dealing with that spike high from the initial public offering just about a year ago. Some sideways action would help it eat through that resistance. As you can see, the stock has a tendency to rally for a day or two and then it goes into these extended sideways moves.

I do not trust HanesBrands (HBI) to launch a major upside move here, but if it fell to $13.50-$14 I would expect a bounce. The problem is that a break of $14.50, and it gets a measured target near $11.50. A rally near $16-$16.50 would be a good place to sell.

I’ll say this about Planet Fitness (PLNT) , it held support at $66. Either it needs more work to rally beyond $80 or it needs to gap up over it. Otherwise, the chart looks like a giant sideways to me. And if it can’t rally to $80 and turns down from here, it could break $66 the next time down. For now I’ll say the range is $66-$80, so it’s pretty much near the top end.