We Got 2 Extremes That Are Good Enough for a Rally

 | Apr 17, 2017 | 6:00 AM EDT
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Late last week, I laid out some of the extremes I would like to see in the market, the type of extremes that I think lead to a good rally. On Thursday, we got one or two of these extremes. They're enough for a rally, but I still believe the decline feels incomplete.

The first extreme we saw was in TRIN, the Trading, or Arms, Index. Thursday's reading was 2.49, which is quite high. A reading over 2.0 indicates the selling has been fairly intense. This is the relationship between the advance/decline line and up and down volume, so a high reading indicates there has been a great deal of selling.

One of the reasons we like to see such a high reading is because when we've gone nowhere for so long as we have, we need a clean-out in the market. As long as folks are still holding positions, every rally is met with selling. Once the selling is done, we've cleaned out the sellers who live overhead.

The last time we saw the TRIN so high was Sept. 13. The red arrow on the chart indicates that time period. The S&P enjoyed a 50-point rally over the course of the next week, but that was it, we turned back down into a much better low six-seven weeks later.

The other indicator that was extreme was the Equity put/call ratio, as it chimed in at 96%. Typically, over 80% is high, so over 90%, or close to 100%, represents some decent level of fear in the market. We last saw a reading this high (99%) on Nov. 2, which seems like perfect timing for the rally, but the S&P fell nearly 1% more before we bottomed.

Then I looked at the three other high readings in the last year and change. The chart below shows us two red arrows where the Equity put/call ratio was high. In each case, we did have a rally the very next day, both substantial (in the area of at least 1%), but as you can see we turned down again. The green arrow was perfect timing. But by then, all the other indicators were extreme as well.

Take a look at the 10-day moving average of the Equity put/call ratio and you can see that it looks quite different now than it did in that early 2016 time period (green circle on the chart). Heck, it's even lower now than it was in February of this year. So where exactly is the panic?

We certainly don't see panic in the Consensus Inc Bulls, who are still nowhere near as panicked as they were in early 2016 or even just prior to the election. And last week's Investors Intelligence readings, with Bulls sill a smidge over 55%, tell us the complacency level, even if this week's readings are down to 50%, remain well above where they are for an intermediate term low.

Yet we are a bit oversold, as you can see on the chart of Nasdaq's Overbought/Oversold Oscillator. The NYSE is not nearly as oversold.

I think there's enough to say we should rally this coming week, but there is not enough to say that the rally should be long lasting or that the decline feels like it is over.

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