What a Wild Ride It's Been

 | Apr 24, 2014 | 6:35 AM EDT
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It might not seem as if the market declined much on Wednesday, but consider this: The Nasdaq gave back all but 5 points of its Tuesday gains. Nonetheless, it seems certain that folks will now become bullish as they focus on Apple (AAPL) and the company's earnings, share buyback and stock split. When it comes to sentiment, what a difference a week makes -- and boy, has sentiment been all over the map!

I feel the need to again review this wild ride we have been on, so please indulge me.

First, in early February, we witnessed hysteria about anything involving the emerging-markets -- The iShares MSCI Emerging Markets Index (EEM) was at $37 at the time. But weren't momentum stocks well? The iShares Nasdaq Biotechnology Index (IBB) was still cruising upward at the time. Of course, this sector was essentially on its last blast upward before it would come back to earth.

Toward the end of February and into early March, the shift took hold in earnest: Emerging markets were terrific, and praise for them grew loud, just as momentum shares were being pounded and trying to find a low. At that time, I said I could calculate higher targets for EEM, but I also noted that was time to take some profits, as the love fest for this group had grown too boisterous and it was time for a retreat.

I still think that, in the coming weeks, we should expect some sideways action in EEM between $40 and $43. As for biotech, well, we knew these shares were close to a low when my mother called to ask if she should sell her stocks in the group.

In any event, at the current juncture, EEM has pulled back and momentum stocks have rallied. In the week since this has transpired we've seen sentiment become dour at the lows, followed by a bit too much giddiness this past Monday and Tuesday, as expressed via two low equity put-call-ratio readings.

Wednesday, meanwhile, brought about the down day I had hoped for. To recap, yesterday morning I discussed the double-top chatter that had been occupying so much air time. I argued that this may cause a lot of folks to bet on that perceived double-top -- i.e., put on short positions -- which may ultimately trigger another push upward. Sure enough, Wednesday's put-call ratio zoomed to 101%. What's more, the put-call ratio for ETFs surged to just over 200%. The last time we saw so many betting on downside was on April 11 -- at the lows!

I suspect we'll now see the giddiness return, with Apple and Facebook (FB) providing the fodder. Wild swings in sentiment are not uncommon at lows or highs in the market. Folks tend to get very emotional when the market goes on a roller coaster ride like the one we've seen so far this year. It appears those who are used to trading the trend, as they easily did in 2013, are having a hard time adjusting to a market that provides no trend. They tend to get bullish at highs and bearish at lows -- and then, in an effort not to do that, they end up fighting both the up moves and the down moves.

I still believe we'll have negative divergences on a higher high in the market. But first let's let this oversold rally play out.



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