A few short months ago, all we heard about was the "1%." Now, for us market players, that has taken on a new meaning: "Can't we get a 1% pullback in the market?" On Wednesday I saw someone joke that he was going to sell T-shirts saying, "I survived the 0.5% decline in the S&P 500."
With that in mind, let's consider the Nasdaq, whose star performer, Apple (AAPL), has gained nearly $20 since Monday morning. In that same time frame, the number of stocks making new highs on the Nasdaq has gone from a very impressive 262 last Friday to 111 on Wednesday. That means there has been little or no follow-through from Friday's terrific reading in more than 50% of the stocks. Are they resting? Probably, but the index is not, as it has climbed a 0.5% in that same time.
Typically, after a period of rest or correction, we see another surge upward. Then we look at how many stocks make new highs, and see if they confirm the move. But, first, we need that correction.
Then there is sentiment. There really are very few wild-eyed bulls out there. The Investors Intelligence readings show 52% bulls, but still a rather hefty 28% bears. I expect, just based on anecdotal evidence, that the bear ratio will fall if the market refuses to correct in the next week or two. In that case, we'll likely see the percentage of bears fall to the low 20s and the bulls rise to the upper 50s. That is often the sign it's become too frothy.
Are the bulls too confident now? I would say they are more complacent than confident. A lack of downside action has a tendency to make folks believe it can go on like that forever. The pattern has been for selling to dry up each time the indices decline by a few points, and folks have gotten used to that. As we all know, the market shows us a pattern over and over again until we learn it, and then it changes the pattern. So perhaps we're a bit overdue for that 1% decline?
The market remains overbought -- and a market that reaches an overbought reading without selling off is a strong one. Still, you have probably noticed how many stocks are churning, or moving sideways lately. Yesterday I noted that the Dow Jones Transportation Index has gone nowhere in a month. If we use an arithmetic scale, the index is sitting right at the ledge, on the uptrend line. If we used a logarithmic scale, the transports would not break until 5200.