Entirely Too Much Bullishness

 | Dec 29, 2013 | 6:00 PM EST
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I see the Santa Rally arrived while I was on vacation. On a statistical level, it was actually one of the best climbs we've seen in months. Let's review it.

First of all, two weeks ago the S&P 500 put in a lower low, and there were fewer stocks making new lows -- and the market was also oversold in the short and intermediate term. This had represented the market's first positive divergence in months. I realize some folks will that the Federal Reserve fueled the rally. To that I would say: Who cares? Don't we often get some sort of news that helps the market move when the indicators line up?

This was the first rally in months that saw the McClellan Summation Index turning up around the same time that the market reached an oversold condition. If you would like to scoff at something, then scoff at the fact that the indicator is far off its peak. But, for now it is still rising -- for the first time since late October -- so it gets the benefit of the doubt.

McClellan Summation Index

Then there is breadth. The cumulative advance-decline line has just reached a higher high for the first time in two months. While this was only by a bare minimum, let's give credit where credit is due.

Cumulative Advance-Decline Line

On the flip side, the market is currently coming into overbought territory -- and, given my moving-average-based Oscillator, my calculations show that a maximum-overbought reading will come around Monday, Jan. 6.

Overbought/Oversold Oscillator -- NYSE

Beyond this, we've seen no improvement in the number of stocks at new highs, and the number remains far below its peak reading. So this negative divergence remains in place -- and, despite the improved breadth, individual stocks continue to lag the indices. The good news is that the Hi-Lo Index continues to move upward. My estimate is that this will peak on or around Jan. 6.

Hi-Lo Index

The 30-day moving average of the advance-decline line, my intermediate term "overbought/oversold" indicator, looks as though it will reach an overbought reading around Jan. 7.

Then there is sentiment. Here's the big "uh-oh." The Investors Intelligence survey shows bulls at 59.6%. I'll go out on a limb and say that I'll be shocked if this doesn't tick above 60% this week. However, what's more important is that the American Association of Individual Investors' weekly survey has chimed in with 55% bulls. Since 2006, the only other time bulls came in above 55% for both of these surveys was in December 2010. After this happened, the market went sideways for two weeks and then resumed its rally.

So I looked at what the Consensus Inc. survey reflected during that period, and it turns out these folks were much more understated than they are today, showing a mere 62% bulls. Today, this survey's bullish reading stands at 76%. Market Vane, which had bulls at 60% near the end of 2010, puts that ratio at 67% today. What's more, you can see Market Vane's four-week bullish moving average is rolling over -- which was not the case in late 2010.

Market Vane -- Bullish Percentage

But the real off-the-charts sentiment indicator -- and one that reflects what folks are actually doing -- is the put-call ratio. The 10-day moving average of the total put-call is at its lowest level since mid-September 2012. As a reminder, that was just prior to a 10% decline in the S&P, when Apple (AAPL) put in its $700 peak.

Now look at the plunge in the 30-day moving average of the put-call ratio for ETFs. As you can see, the put-call hasn't often plunged in this manner. The green boxes highlight the similar drops: in 2010 -- when the S&P fell about 10% -- and the above-mentioned 2012 peak.

ETF Put-Call Ratio -- 30-Day Moving Average

(One plunge came after the fall 2011 low, as well, but this was when the market began rising from the ashes after a 20% drop -- quite different from the current situation.)

So, while the calendar will work in the market's favor for another week or so, and while breadth has improved somewhat, here's the bottom line: The market is not yet at a maximum-overbought reading -- and sentiment is unbelievably bullish.


Overbought/Oversold Oscillator -- Nasdaq

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