Bulls and Bears Are Upset, But There's No Sense in Harping
Here's what I have learned about sentiment after last week, why I give the market 'leeway' — and where we stand right now. Plus, a look at Palo Alto, Universal Display and more.
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The Market
Sometimes you can tell a lot about sentiment from general market commentary—more than you can from the actual indicators. I thought about this over the weekend because Friday morning I had bears upset with me that I wasn’t "more bearish" Thursday evening and I had the bulls upset with me because I wasn’t harping away at how short-term oversold we were and how the Russell 2000 was at its 50-day moving average.
Did I harp? I did not. Did I discuss both points? I did. I tend to harp when something in the market is persistent and no one is paying attention. Like the way I have been harping about the Transports for the last few months. I tend to pound the table on an oversold condition as I did in late April because the indicators were screaming to do so.
But in between I tend to give the market leeway to change the trend. Since late April the trend has been up. In the last two weeks the trend has been one giant chop. And that I believe is what I have learned about sentiment after last week. The bulls insist we must continue on to the upside and the bears are anxious for a turn.
Based on the indicators, I do think we are closer to the top of the range than a continuation of the rally from late April. Will I time it perfectly? I doubt it. The reason is because I think we have a situation where the index movers have started to drag the index higher while the rest of the market has stuttered and stalled.
Just go through the various groups that did not make a new high with the indexes: Industrials, Software, Transports, Utes (yes, the Utes!), Drugs, Discretionary, Biotech, Energy, Financials, and yes, I am even going to throw the Metals in there. They corrected quite sharply last week and barely joined the rally on Friday.
That means all those groups are apt to get short-term oversold and enjoy another rally attempt, likely making lower highs. If I am correct about that then the number of stocks making new highs should continue to contract as it has been. Down below you will see the Hi-Lo Indicator has rolled over already.
If I am correct about that then the McClellan Summation Index, which has rolled over, might have one more attempt at turning back up but it ought to struggle.
We already know that sentiment is quite bullish using the various indicators. The Investors Intelligence bulls are 59%. The AAII bulls are 47%. The NAAIM Exposure is 94. The 10-day moving average of the put/call ratio is quite low and turning up. The Citi Panic/Euphoria Model is back into "Euphoria."
If we think about a different sort of sentiment indicators, we can look at Nasdaq volume. I like to see it in relation to the volume on the NYSE. I like to plot it on a 30-day moving average to smooth out those few days that might be extreme like rebalancing and expirations, etc. Below I have plotted it with the Russell IWM in the top panel. Notice all those spikes in volume were accompanied by a correction in the Russell. I think that is because it shows there is now too much speculation in the market.
Over the next few weeks I am going to watch the breadth of the market. It began lagging in the last week or so as you can see the S&P 500 (lower chart) is a mere 20 points from a new high but Breadth (upper chart) might struggle to make a new high.
New Ideas
CME Group CME is finally lifting itself up. I might have to give up on it if it can’t cross that downtrend line on this trip up.
Today’s Indicator
The Hi-Lo Indicator has rolled over.
Q&A/Reader’s Feedback
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I recommended Palo Alto Networks PANW back in April and it has done well. The question is if it can fill that gap. It ought to try, although I don’t know if it is going to do so in the next week or so. I would get concerned if the stock breaks that uptrend line I have drawn in below. It currently is around $302 but it rises as the week goes on. A week from now it will be $310, etc.
Universal Display OLED has done nothing for the last few weeks but it is a technology stock so I would give it a chance to crack over $180. If it can do that then I would look for a gap fill around $185.
The question is if I see a big head-and-shoulders bottom in Bunge BG. I wouldn’t argue too loudly against it. While I have drawn in that short-term uptrend line I would be inclined to give this leeway down to the $100 area because it does trend to trade rather thinly.
