Some of the Complacency Gets Blown Away

 | May 18, 2017 | 6:00 AM EDT
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Even I must marvel that almost as soon as folks stopped fretting over every scandal or perceived scandal coming out of Washington, D.C., the market seemingly started to care. Was it the D.C. news or was it a realization that there have been problems for a while? Why else has breadth been underperforming?

For example, retailers have been obliterated. The oil stocks have been crushed. Media stocks decimated. Transports traded at a new 2017 low on Wednesday as well. When I tweeted that General Electric (GE) was at a new 52-week low and no one cares, I got a reply that said I should stop fretting because it is not a bellwether.

Well heck, it might not be a bellwether and IBM (IBM) isn't either. But if we're going to dismiss GE and IBM, are we dismissing the truckers, too? And what about the retailers, oils, media and biotechs and commodity stocks, etc? Because every time you rationalize one group or one name, you have to do it for all the other names and then you're rationalizing everything.

Let me give you some of the minor positives that I saw in Wednesday's trading. First of all, we didn't have panic, but we surely wiped some of the complacency away. After having three straight days with the equity put/call ratio under 60%, it moved up to 73% -- not terribly high, just higher than it's been. Panic is what we saw right before the French election runoff when the equity put/call ratio showed up at 96%.

Some will note the VIX really moved. Sure it did. And some may quibble when I said it doesn't look jumpy to me. It's a very subjective discussion on the VIX and its jumpiness, but to me it should look like it's breaking out, it should look like you think it is going to burst ever higher. Right now it surged -- to just shy of the April highs. So to me that doesn't qualify as jumpy. It qualifies as complacency no longer being present and some fear creeping in.

Nasdaq saw 89% of the volume on the downside. Over 90% and we have panic. So 89% is close; I'll call it a lot of concern. Couple that with the fact that the PowerShares QQQ (QQQ) saw the highest-volume day since mid-December, when there was volume on the upside, so it doesn't count for this example. Notice that when we get high volume in the QQQ on the downside, we typically see a short-term rally.

Yet the number of stocks making new lows on Nasdaq were the highest since November, when Nasdaq was 1,000 point lower than it is now. That means there is no positive divergence. The McClellan Summation Index is still heading down as well, continuing to tell us what the majority of stocks are doing (heading down).

I think we can have a rally or some stabilization Thursday, but there were not enough extremes for me to believe we simply turn around and head back up without a care in the world. There is likely more of a process to go through now. The sort that leads to real fear in the market a few weeks out in time.

One final word on the dollar. It is quite hated. The Daily Sentiment Index (DSI) is now 6% for the Dollar Index. Remember that this is a tally of bulls, so that means 94% are bearish. The last time the DSI for the dollar was so low was late April 2011. Here is the chart from then:

I can't come up with a reason on the chart to like the buck here except that 97 shows some support. But I do know that when sentiment gets that bearish, it's time to pay attention and look for a rally.

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

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