Don’t Expect Much of an Oversold Rally with Sentiment so Complacent
The best rallies set up from a place of fear. So, although stocks may be nearing oversold, until investors are fearful, we can’t expect much from a bounce.
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The Market
The Either/Or Market remains with us. And even at that, today’s rally in tech was pretty pathetic. But let’s focus on sentiment.
Lately, I have not spent much time on sentiment, simply noting that all the oversold conditions for a rally exist, but sentiment remains complacent. And to me, complacent sentiment is not bullish. Thus, in the last several months, we simply can’t get out of the situation we’re in.
That situation is the market gets oversold but never gets bearish. Except in late July, when the SOX was cascading lower, and we got a high-volume decline in the SMH coupled with a very high put/call ratio (the ten-day moving average of the put/call ratio got to .96). The current decline in the SOX might feel terrible, and it may feel as though everyone is bearish on the semis, but the ten-day moving average of the put/call ratio is .86. That is just not screaming ‘too many puts’ (no matter what Goldman Sachs says!)
Let’s go back to the late March low and note that the ten-day moving average of the put/call ratio was 1.01. That is what fear looks like. It’s what bearishness looks like. .86 is not.
Or there is the Investors Intelligence survey. In March the bulls got to 33%. In August they were 49%. Today they are still at 56%, although I expect to see that lower when it is released on Wednesday. But the point is the same: the complacency is high; fear is not.
I did note the NAAIM Exposure fell to 74, which does happen to be a bit lower than late July (80) but a far cry from the reading of 60 in March.
Many like to cite the Fear and Greed Index but look at this metric over time. A dip into Fear (under that dashed line) is not always a sign there is real fear. I have shared just four other times (green arrows) that it dipped here, and the rally from it was quite meh.
Part of it might be the nature of the Either/Or Market since something always seems to be rallying. That manages to keep the S&P levitated, but it does nothing for the sentiment. So yes, I would rather the market get whacked in the next few days since maybe that would change sentiment as we head into this current oversold condition. Barring that, I don’t think we can expect the kind of rally everyone thinks we should get from this oversold condition.
New Ideas
Alcoa (AA) has been a terrible chart since May. But it has quite a bit of support down here, and so in the coming weeks I will highlight some names that I think are tax-loss rally candidates. This one is on my list. I am wrong if it cracks under 38.
Today’s Indicator
The 30-day moving average of the advance/decline line is oversold. Nasdaq’s is more oversold.
Q&A/Reader’s Feedback
Schwab (SCHW) has some support as it heads into that 86-88 area, but the best I can say about it is that it would be oversold and due for a bounce. There is no pattern that shows signs of basing, just oversoldness.
Cerebras Systems (CBRS) is a recent IPO, so it’s hard to say where it has real support. That pattern it broke down from, though, measures to around 90-100, so I’d be inclined to sell a bounce into that 150 area and would consider it a huge gift if it got back to 160-170.
If Lumentum (LITE) can hold 800 and bounce, I’d still be a seller on a rally, especially if it got into the 950-1000 area.
Elmet (ELMT) does not have much history to go on, but at the very least we can say that the stock seems to have very little ability to hold/maintain a rally. Look at all those spike highs it has had in its short life. I’d like to see it fill the gap at 17 before rallying again, but the inability to hold a rally says to me it’s just a trade.
