I have written before about how slowly sentiment turns. One example I gave was quite recent when we saw the Investors Intelligence bulls at 60% in early October but it took until the first week of January -- three months! -- before we saw those bulls shrink to under 30%.
As you know by now I have been expecting the Investors Intelligence bulls to get into the 50s by now. I must report to you that once again I am wrong in my assessment. This week's reading is 48.6%. It's getting closer but it is not nearly as bullish as I had expected.
I did go back and look at the last two times we saw the bulls under 30% and I was surprised to discover that off the 2016 low it took from February until July for us to see the bulls back over 50%. Wow. Back in 2010 (the time prior to 2016) it took two months. If we look at the 2016 time period we see that five weeks after the bulls were under 30% they had scooted up to 47% (green box). And what dd the market do? It spent the next month or two sideways.
If we move to a more immediate sentiment indicator we find that the rally on Tuesday brought the Daily Sentiment Index (DSI) to 77. It's easy to see that if we rally another day or so we are likely to see this over 80 and once over 80 it's usually best not to add to positions. Over 90 it's best to exit some positions because the likelihood of a reversal is high.
I will once again report that there is nothing wrong with breadth but for nearly four weeks the small caps (Russell 2000) and the large caps (S&P) have been rocking back and forth, neither one outperforming the other for very long. This ratio becomes concerning if it makes a lower low.
Speaking of lower lows, when we look at the IWM relative to the QQQ we see it is on the verge of making a lower low (under the mid -January low would be a lower low). We care about this because as you can see in December, as stocks careened toward that December 24 low this ratio refused to make a lower low (a positive divergence) so there is a message in this ratio. If you're bullish you want it heading up or at least moving sideways.
There was one other minor change this week. For the first time in a month neither Monday nor Tuesday has been red on the day. If you consider that a pullback on Monday and/or Tuesday has led us to rallies in the latter part of the week, then rallies on the first two days of the week will take us right into the intermediate term overbought reading on Thursday.
I still expect volatility to pick up as we get to that intermediate term overbought reading.