Investors Swing From Bearish to Bullish Fast These Days

 | May 17, 2018 | 6:00 AM EDT
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If Wednesday's rally turned you wildly bullish you are not alone. You see the equity put/call ratio dropped to 50%. That's quite a lot, considering the total put/call ratio after Tuesday's decline was 111%. Folks seem to be going from bearish to bullish and back again quickly these days.

I realize I use 'under 50%' as my line in the sand to note if the equity put/call ratio has gotten extreme (too bullish) and that some might argue there is not a big difference between 50 and 49, and they would be correct. I would note that the Equity put/call ratio went to 49% last on the 26th of January, which you might recall was the peak in the S&P 500.

The Equity put/call ratio slid to 51% last Thursday. Last Thursday the S&P 500 closed at 2723. Wednesday it closed at 2722. Was it bearish? That's debatable, but it surely wasn't bullish, was it?

The 10-day moving average of the equity put/call ratio is now back near where it was in mid March, when we peaked. It has not turned up yet. Recall two weeks ago, when the market was making its low the equity put/call ratio was 76% (bullish). That means after Thursday we drop that reading off the 10-day moving average. It's the last of the high readings. I think we ought to see this moving average turn up in the next few days.

My own Oscillator will be overbought after Thursday's trading. The Nasdaq Momentum Indicator is overbought now. You can see that I have plugged in a 'what if' to take Nasdaq higher by 200 points in the coming days and the Momentum Indicator goes down.

I want to remind you that while I look for a move up in volatility in the next week I am still not bearish. The reason is because as long as breadth -- and therefore my indicators that are based on breadth -- is rising, then I'm not looking for a huge move down in stocks. After all, the last two days were volatile weren't they?

Moving back to sentiment, the Daily Sentiment Index (DSI) showed some changes, but not many. Gold and Silver saw their DSI's move up to 13 from 10 so we never got the extreme reading, or at least not yet. The Dollar Index stayed at 91.

The euro however, did slip back to single digits (8) giving me more confidence that we should see another euro rally in the coming days. Finally, the bonds saw the DSI move to 18. This indicates it too is getting extreme.

I want to leave you with one more thought. Years ago lower rates were supposed to be bullish for banks but now everyone says higher rates are bullish for banks. In the last four trading days the yield on the 10-year treasury note has gone from 2.95% to 3.1% and the Bank Index hasn't budged. If they are not going to rally hard in that kind of interest rate move, then when? Or is the narrative wrong and they would now prefer lower rates? I don't know, but it's a divergence worth paying attention to.

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