I Liked the Market Better Before the Rally

 | Nov 22, 2017 | 6:00 AM EST
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I liked the market much more last week when folks were rather ambivalent about the rally.

You do recall that after Thursday's big up day, where the FANG stocks were mediocre, and then Friday's action when the major indexes went down, folks loaded up on calls for the VIX. Friday's put/call ratio for the VIX was under 20%, meaning the betting on a higher VIX/lower stocks was extreme.

But then Tuesday's rally came along and the breathless chatter on television arrived. The calls of "rally into year end" arrived. The calls for FANG to do nothing but scream onward and upward arrived. It is amazing how price changes sentiment, isn't it?

Speaking of sentiment, the equity put/call ratio was under 60% for the third consecutive day. This is the longest streak since early to mid-September. But what that has managed to do is what we looked at last week -- turn the 10-day moving average of the put/call ratio down.

The bothersome part of sentiment for me remains with the Investors Intelligence bulls, which are still over 60%.

However, the number of stocks making new highs increased. There are fewer new highs than there were in early October, but there was quite an increase Tuesday. Because the market is not yet overbought, I am willing to give this a chance to improve.

But really for me, it's about that ratio of the Russell 2000 ETF (IWM) to the Nasdaq-100 ETF (QQQ) . And with Tuesday's big rally in the FANG names (which admittedly I didn't think we'd see), I was sure the ratio would falter. Yet it didn't. It just went sideways. So as long as this can hold its own (it needed a day or two of rest anyway), the oversold rally gets a chance.

Since I am sure by now you are tired of my constant harping on the small-caps, let's look at the down-and-out transports today. You have seen the black line before, since I drew it in when the transports first bounced from there. Let's face it, the transports have lagged and not in a minor way. There is a Dow Theory non-confirmation in place.

I think they should make an attempt to get to those red lines. The flat line comes in at 9800. So does the downtrend line. But understand that the longer it takes, the lower that price is because the downtrend line's price gets lower as time goes on.

If we look at the Airline Index, we can see it is right up against a downtrend line. It's already up 7% in just over a week, so getting through on this first trip up might be hard. If it does manage to get over the line, I expect it to run smack into resistance in that $112-$114 resistance zone. However, crossing that downtrend line would mean pullbacks toward the line would be buyable.

Wishing all Americans a very Happy Thanksgiving!

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

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