Was it just last Thursday that folks were so bearish they screamed the put/call ratio to 131%? Yes, you remember the hysteria over the Apple (AAPL) earnings or lack thereof? I know it seems a lifetime ago, but it was less than a week.
Since then the S&P is up about 125 points and Nasdaq is up a whopping 430 points or nearly 7%. Yes, that's right -- 7% since everyone did their best impression of Henny Penny. Has sentiment shifted? Yes. But has it shifted to an extreme? No.
For example, the Investors Intelligence readings, which did a terrific job last week of forecasting the rally when we saw more bears than bulls for the first time in years, have shifted but not dramatically. Last week the bulls were at 29% and the bears at 34%. Now the bulls have swapped with the bears so the bulls are at 34% and the bears are at 29%. There is nothing noteworthy in those readings except the shift.
The 10-day moving average of the equity put/call ratio has fallen like a rock. It currently stands at 64%. Readings under 60% have been trouble for the market so we'll have to watch that but in the last 10 days there have only been two readings under 60% and one was 59%. Here we see the sentiment shift but it's not extreme yet.
Now let's talk about the overbought reading because using my own Oscillator it hasn't been this high since July 2016. That was post-Brexit. Yesterday I showed the February 2018 high that had a dip and back up. Here's a different situation. But I should note that I expect the Oscillator will be higher again on Wednesday regardless of what the market does (it's just the math). Recall I said my own Oscillator would be overbought on Thursday and that is still the case.
That green circle is July 2016. That was the rally post-Brexit. Here is a close up of what the S&P did after that overbought reading. Unlike yesterday's chart, it spent weeks chopping about, then it dipped and then it rallied again. There are different ways of handing such an extreme overbought reading and I expect some sort of pullback but again, I do not expect anything extreme or severe because I don't believe sentiment has shifted enough.
To show you another shift in the indicators, here is the daily change in the spread between the 50- and 200-day moving average lines of the Russell 2000. In December I showed you this chart noting we hadn't been this oversold since late 2008. Now you can see that oversold has been worked off. It has not quite crossed the zero line but it is now the highest it has been since September.
A pullback would shake out weak hands/newfound bulls. It would also make some of the charts better. So would sideways. I'd prefer the former over the latter. We'll see what the market prefers.