The Bulls Are Leaving the Building. That Could Improve the Odds of a Rally.
It’s counterintuitive, but if more people turn bearish, then there is more fuel for a rally as those investors jump back into the market.
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The Market
We got yet another change in sentiment. It isn’t huge considering what individual stocks have done, but it’s a shift. The Investors Intelligence bulls, which were at 56% a week ago are now at 49%. As a reminder in mid-September, they got to 48% and in March, that number was 33%.
This brings me to a question I received today: why do we need to see a drastic change in sentiment to get a rally, considering how oversold we are. It is my experience that when sentiment starts from a relatively high level of bullishness, we tend to get folks bullish much faster than we do when sentiment is showing bulls at a low level.
Consider that 33% bullish reading in March. That gave way to a two-month rally. From late March until early June the tech stocks were on a tear. Now look at the mid-September reading of 48%. We got a nice romp in tech stocks, but it didn’t last.
I’m sure there are times when bulls were high and we got an extended rally but typically that’s not the case.
For example, the DSI for the VIX is back at 15. So, let’s say the S&P rallies because tech stocks rally (my expectation remains that big cap tech/semis rally), how soon do you think it will take the DSI to get under 15 (early warning) or near/at 10 or below? You see? That’s why we want sentiment bearish, so that we can get an extended romp off the oversold condition.
Aside from that, the oversold conditions for tech continue. As does the Either/Or Market. Breadth was flat today with the S&P up 44 points. Someday that will change. I would welcome the change in a market that can work and play well with others!
New Ideas
But when will the banks rally? That is a question that has filled my inbox. I got stopped out of Citigroup, but I can tell you that my downside target on Goldman Sachs (GS) (from last summer when I was a seller of it) was 865 and that was tagged in the last week. That spike high at 930 is problematic but for a trade GS ought to get into that 940-950 area.
Today’s Indicator
The Volume Indicator keeps moving up. At 46%, it is still oversold but at least it has lifted from 44%.
Q&A/Reader’s Feedback
If SoFi (SOFI) can get itself up and over 15-ish resistance then this last week or so will look like a false breakout. Failure to do that in the next week or so will have me thinking this breakout (breakdown) is real.
A while back I said that Nike (NKE) could be a tax loss rally candidate but now it has rallied close to 20% already. I do think it makes its way to that resistance around 40-ish, then I would reassess.
Axon (AXON) is at support and oversold. It could/should rally. If it gets to that 440 area, that would be an area I’d take something off the table. Let me pose a caveat. If we get sentiment bearish, then I would think this has potential to get into that 500+ area.
The resistance on EWY, an ETF to be long the Korean market is right here, around 160. I always give a chart a chance to recapture a breakdown, especially when they break and have very little follow-through. I typically give them about a week or two. Failure to do that and that July low around 145 is the next stop.
Micron (MU) has an awful lot of resistance in that 1000 area. If it breaks 850 then I think that blue line comes into play. If sentiment changes, I will gladly change my view but until then I expect rallies to fail.
