Bullishness Comes in Fits and Starts

 | Apr 05, 2017 | 6:00 AM EDT
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On Tuesday morning, a reader asked me if I thought it was strange that, anecdotally, I was seeing a shift to caution from longtime bulls and that the put/call ratio had not gone up that much on Monday. It was a good question, but the only answer I had was that the total put/call ratio had zoomed to 119% on Friday.

But here we are after a muddled day on Tuesday, and the put/call ratio for ETFs has skyrocketed to 265%. That is eye-poppingly high. Since the election, we've seen such a reading twice and both times were extremely bullish. The three readings between January 2016 and the election were not nearly as bullish for the market, but they did produce a short-term rally.

Here's the chart from September 2016 through the present for the S&P, with the arrows marking the high put/call ratios for the ETFs. In September, we popped and when it was over the market came right down.

In early 2016, there were two such high readings. In January, we did not see a rally until two days later, and you can see that while it was sharp, it was not long-lasting as we came back down. In March 2016 we had one up day before we came down. We did rally subsequently, but it wasn't much before we came down again in May and June (not shown on the chart).

As I noted yesterday, the deterioration underneath is starting to add up for folks. I think they are frustrated that a mere handful of stocks are the only names keeping the indexes up. I see it in conversations but more so I see it in volume. It has fallen off a cliff. Yesterday, I showed the McClellan Summation Index for Nasdaq using volume, which shows you the lack of breadth for Nasdaq even with it at the highs.

What's so amazing about this situation on Nasdaq is that the net volume has been positive for eight of the last 10 trading days and still it will need a net differential of +300 million shares (up minus down volume) to get it to turn back up. Keep in mind, Nasdaq is at an all-time high, or mere pennies away.

That is not healthy. Nor is it healthy that there were 48 new highs on Nasdaq on Tuesday while there were 45 stocks making new lows. This is why I will continue to show this chart of the Semiconductor Index (SOX) and this uptrend line. It's not that a break of this line will change the group in one day, but it signals a change in a beloved group, and one thing we have learned about this market is that when the turn comes, it can often be violent.

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