Lack of Concern by Investors Over the Pullback in Oil Concerns Me

 | Oct 03, 2017 | 6:00 AM EDT
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The market keeps motoring along. And breadth remains strong. The small-caps remain strong. The banks remain strong. Perhaps that's why sentiment has gotten giddy.

The CNN Fear and Greed Index is at 89. It touched 90 intraday on Monday but it refused to close there, an attempt to keep it in check, from getting too giddy! But it was the Daily Sentiment Index (DSI) that caught my eye.

Recall that the DSI measures bullishness. So a high reading says there are far too many bulls. A reading over 80 says we're stretching the rubber band quite far. The most recent example I can offer is last week when oil ran to 52 and the DSI tagged 89. At the time, I noted it seemed far too many were far too excited over the oil move and I expected it to retreat. Retreat it has; Monday it tagged $50.

It is my current expectation that we will see a bounce off that $49 to $50 area. I have thought we'd see it rally again after the pullback, so I will stick with that view. But the lack of concern on the part of investors over the pullback is getting me concerned. Perhaps a move under $50 will see a minor fuss? Or perhaps they need to see the stocks stall out?

Now let's get back to the DSI, because after Monday's trading the DSI for the S&P 500 shot up to 83. Sure, it can go higher, just like oil's last week could go higher, but once we get over 80 we tend to need a "timeout." The last time the DSI for the S&P 500 was 83 was July 20.

What's interesting about July 20 is that that particular timeframe was the last time we tagged this resistance line on the S&P 500. Let me point out, the S&P 500 did not roll over immediately. It stayed up there for three weeks. It wasn't bearish; it was a timeout. Well, until it was more than a timeout!

Let me also point out that breadth was not as strong in mid-July. The Russell 2000 was not as strong in July. The banks were not as strong in mid-July. And certainly the oils were not as strong. In fact, look at the number of stocks making new highs on Nasdaq. Monday (350) marked a smidge more than early June (344), but note how lethargic July looked. So this is not the same as July, but that doesn't mean we shouldn't see a breather.

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