Why Have Bulls Come Out in Droves? It Might Not Be the Reason You Think
The speculation in the meme and penny stocks was the talk of the market last week. But I have an alternate theory on why folks seemingly got so bulled up.
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We’re at that point in the rally where if you are the least bit cautious you are a pariah. We’re also at that point in the rally where the indicators are all still pointing upward and we’re waiting for signs that those indicators will stop doing so.
But let’s talk about sentiment.
There was very little change in the sentiment surveys last week. They got bullish the week before and didn’t exactly extend that bullishness in a major way. The place we saw the change in sentiment most is the Citi Panic/Euphoria Model as it moved back into "Euphoria" after dipping out of it for a few weeks.
On Friday I discussed the change in the put/call ratio we saw last week. That continued on Friday. Sure, maybe it’s because it was options expiration last week but let’s look at the five-day moving average of the put/call ratio. It is now the lowest since early December. The market didn’t care about this low reading in early December but that’s not what I am focused on.
Look at the swiftness with which it plunged last week. The entire rally in the last month (from the mid-April low) did not see such a move. In fact we haven’t seen this moving average take a plunge like that since late November. In any event, if it falls much more it will be toying with the low from last July (a high in the market)
But I have a theory on why folks seemingly got so bulled up last week. Well, we can see the speculation in the meme stocks, which I discussed almost every day last week. Penny stocks and meme stocks taking over the market is surely not a sign of too many bears is it?
But I also think it was because technology had been sitting there doing nothing. If we use the SOX, it had that initial burst off the April low, a dip and a rally right back to that high. It wasn’t until last week that we got a two-day surge in semis and folks were able to forget the consumer and focus on their beloved growth stocks.
For most of my career I have thought the semis are a leading group but in the past year I have noticed that software seems to lead the semis. Take a look at the iShares Expanded Tech-Software Sector ETF IGV last summer. While the SOX was able to rally back from that mid-July swoon to an equal high (green lines) the IGV was making a lower high. And then came the summer/fall correction.
Now look at the fall. IGV mostly held support into that last drop in October while the SOX broke it handily (blue lines). The SOX plunged to its spring low while IGV stayed well above it. Then there is this year. IGV made its high in early February; the SOX waited until March.
So while everyone will be focused on Nvidia NVDA and its earnings this week I am going to watch to see if the IGV can cross over that downtrend line.
