Market sentiment has a funny way of showing itself. The relief that we got a "fiscal cliff" deal sent the market soaring, even though the agreement turned out to be a crummy one -- yet you see that, for eight out of the last 11 trading days, the market has been in the red. I think that's why we aren't seeing much giddiness at this juncture.
The bulls take that as a positive -- being able to wipe out eight negative trading days in just two sessions. Same goes for the fact that the market hasn't sold off much since the big two-day rally.
The bears take it as a negative: In more than two weeks of trading, we've seen only three up days, even if they were big days. That is more typical of a bear market, they say.
On television you can hear the case made for both sides, and the bear case says fourth-quarter earnings should be awful. To that I say: Then where are the warnings? Shouldn't we have seen more of them by now?
The bear case also says we should just wait until February, when the debate over the debt ceiling will take place. Heck, I've thought that would be a concern, too -- but we all know that, when everyone is fretting so much over the same issue, it will have already been priced in. That, or they will forget about it, much in the way the fiscal cliff was temporary sidetracked by the election.
So when we look at the bear case, we can understand why Tuesday's equity put-call was at its highest level since Dec. 4. That tells us folks got a bit nervous during that session -- which, on a very short-term basis, should be bullish for the market.
However, the fact that it finally ticked up means the 30-day moving average of the equity put-call ratio is also ticking up now. That typically happens the market gets closer to a high.
The situation is not much different when we use the 10-day moving average of the equity put-call ratio. It, too, has started to "bottom" -- and when that happens, stocks usually top out.
What surprised me most was that the Russell 2000 has been leading the market to the upside, yet this index closed Tuesday just 1 point higher than where it closed last Wednesday, Jan. 2. Is it any wonder folks aren't exactly giddy?
I don't know what it might take to trigger such a change in sentiment -- but I suspect that, if stocks had another try to the upside later this week, we could see less fretting and more relief. I continue to think the number of stocks making new highs will not exceed 495, which was the peak reading back in September, when the S&P 500 was last trading up in the current area. The peak reading last Wednesday was 454.
I suspect that, if stocks can manage to rally one more time, all this fretting will go away and we'll have some giddiness, combined with some negative divergences.