Suddenly, Everyone's a Fan of the Market Again

 | Mar 16, 2017 | 6:00 AM EDT
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Was it just yesterday that folks were finally concerned that the transports were down? Was it just yesterday that folks were finally concerned that the Russell wasn't participating? Was it just yesterday that they finally discovered high-yield was crummy? And what about oil? That too only became a concern on Tuesday.

But what a difference a day makes! Concern has left the building. And on some level I can understand why. You see, breadth was terrific. We have to go back to Sept. 21 -- yes, before the election -- to discover another day when breadth was so good (there's an arrow on the chart). Uh-oh, maybe when breadth is "that good," it's not such a good thing?

In terms of giddiness, we saw it in the put/call ratios. We saw the put/call ratio for ETFs move under 100% for the second consecutive day. This does not happen often. In the last five years, I see 10 such clusters where there are at least two consecutive days with readings under 100%. One of those times, there were three clusters within a week of each other, so let's call that "once." There was one other time with two such clusters within a week of each other, so let's call that "once" as well.

Let's take a look at the chart of the S&P to see what transpired. On the first chart, we begin in September 2012 and go through February 2014. The first curiosity is that we saw no such clusters in 2013, the year the market was literally straight up. So folks never got that giddy, at least using this indicator, in that entire rise.

Notice that in both cases (red arrows on the chart) it took weeks before the market rolled over. So there was no instant gratification from this indicator if you're bearish.

In 2016, we saw several of these clusters. In the final days of 2014 we saw these clusters, and we can see in this case the market did offer instant gratification on the downside. The blue arrow in March 2016 is the only time that we saw a quick two-day pullback that was tiny and another rally that was worth it as the S&P tacked on another 3% after that. The next two instances saw the market correct, with April taking about two weeks before it mattered, but in June it occurred in the days prior to Brexit, so instant gratification was at hand.

Last July, the market went sideways, had a two-day decline two weeks later and then churned sideways some more. In fact, it did not go down until September, two months later.

How do we resolve this with the current oversold condition? I think it means if we pull back in the next few days, we'll see another rally. But it will take more than one day of very strong breadth to convince me that there's a lot more on the upside.

For more market analysis from Helene Meisler, sign up for Top Stocks, published five times a week.

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