Market Is Feeling More 'Sentimental'

 | Mar 14, 2017 | 6:00 AM EDT
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I am a firm believer in sentiment. I am also a firm believer that there is very little that changes sentiment more than price movements. Considering the S&P 500 is the same level it was three weeks ago you would think sentiment hasn't shifted much. Yet it has. Probably because the Russell 2000 has performed so poorly.

All of a sudden I hear folks on television say they are concerned. They cite the underperformance of the Russell. Or now I see some are concerned over the Transports (as they should be). And yet that concern does not translate into higher put/call ratios on a regular basis. It did, however, translate, on Friday, to a very low reading in the VIX's put/call ratio.

As a reminder, a put/call ratio is considered a contrary indicator. A low reading tells us too many calls are being bought relative to puts and a high reading tells us the opposite is true: too many puts relative to calls. So a low reading says folks are far too bullish on the instrument. Friday saw the put/call ratio for the VIX swoon to 16%. That's an awful lot of betting on a higher VIX, isn't it?

That then is a change in sentiment, isn't it? A great number are now expecting a rise in volatility. And a rise in volatility usually means a decline in the stock market. That often means the market rallies first, just to shake them out.

Away from that, let's talk about the pattern that has developed, or more appropriately might develop, on the chart of the Russell 2000. It is bouncing off this uptrend line, and admittedly the bounce thus far has been pretty pathetic, but it did just enjoy its first two consecutive up days in nearly a month. I stare at this chart and wonder if a rally that fails under 1,390-ish will look like the right shoulder of a head-and-shoulders top.

Of course much will depend on the statistics and how the indicators develop as this oversold reading wears off. If the market doesn't collapse on Tuesday (it is my expectation that it will not collapse on Tuesday) we should finally see a lift in the Overbought/Oversold Oscillator, one that we can actually see without a high powered magnifying glass.

In the meantime, the McClellan Summation Index has rolled over with some oomph. Keep in mind this chart tells us what the majority of stocks are doing, so in this case, it says the majority of stocks have given back two months of gains.

That is not to say that all stocks have done that; we know that is not the case. But this indicator has been a good guide to tell us what the majority of stocks are doing and it will now take a net differential of +2,500 advancers minus decliners on the NYSE to turn it back up. That's still two pretty strong breadth days in the market.

Therefore, it is more likely that whatever oversold bounce we get is likely to come back down again. And I suspect if that happens we'll see sentiment shift very quickly toward fear. Just look how quickly they bought calls on the VIX last week.

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