For years it seemed as if you had to jump the gun in the market when buying dips because the market rarely waited for a good oversold condition before it rallied. But that hasn't been the case lately. In fact it's been the opposite. The selling seems to start a few days before we get to maximum overbought. Yes that's a big change in character in this market.
But didn't we know months ago that there was a change? We did. If you were paying attention you saw the number of stocks making new lows rise drastically in September. If you were paying attention you saw the narrowing of the market's breadth last summer. If you were paying attention you saw the small caps underperform at the very beginning of the third quarter. This did not "start" in October. October is only when everyone wants to date it back because that's when they noticed it.
But let's talk about what we have in front of us now. We have a market that is getting grossly oversold. The Nasdaq Momentum indicator is now there. My own Oscillator will be there on Wednesday. When I do a calculation for the McClellan Summation Index we find that it now needs a net differential of +3,000 advancers minus decliners to turn it from down to up. At +2,000 it is oversold. At +4,000 it is grossly oversold. So if we did manage another down day on Tuesday I have confidence this would push to +4,000 and move into the grossly oversold category as well. Consider that the Russell 2000 has been red for 8 of the last 9 trading days.
Now let's talk about sentiment. When I first began discussing the possibility for a Santa Rally to begin midweek this week it was a week ago. The S&P was significantly higher and one of my concerns was that sentiment was not in the right place, especially when we used the 10-day moving average of the put/call ratio. It is pushing upward now but it is not extreme.
What did get extreme though is the one day readings for the various put/call ratios. A few weeks ago the put/call ratio for ETFs was sub 100 almost daily, enough to bring down the moving average. Monday it finally scooted over 200% for the first time since mid November. That's a sentiment shift.
Then there is the total put/call ratio which pushed up to 137%. This is the highest reading since October 26 which led to a rally. In fact, take a look at the chart of the S&P with green arrows noting the three times the indicator got this extreme in 2018.
But it was the equity put/call ratio that really caught my eye. It was 97%. Consider in the entire year of 2018 we have not seen it over 90%, now it is almost 100%. It was 88% on February 9, the low for that cycle. Here is a chart of the last three times it was over 90%. We have to go all the way back to August 2017 for the first such reading.
Finally the Daily Sentiment Index (DSI) moved to 8 for the S&P and 10 for Nasdaq. Volatility's DSI moved to 90.
Again, I am not here to tell you the market is in great condition. It isn't. But a week ago I set my sights on an oversold condition midweek this week and now we're here. And we have some extreme sentiment readings too. I still think we get an oversold rally.
