I am a big tennis fan. I love to watch the matches. Wimbledon is currently in progress, so fans have been focused on the matches in London. There are all the side stories as well as the actual matches, but it all begins with the draw.
That's when the officials decide how to seed whom, and then they pick who plays whom. Some think it's all rigged, but mostly it turns out to be the luck of the draw. When the draw came out two weeks ago, Serena Williams, who is probably the greatest female tennis player ever, but is having a slow year, was seeded 11th. She ended up in the same "quarter" as two other Grand Slam champs, and so all the commentators termed her section of the draw the "quarter of death" -- meaning whoever came through would have to beat some excellent players just to get to the semi-final.
Here we are in week two and Serena is in the quarter finals and has not faced one of the other champions, because someone else beat them. So her unlucky draw meant nothing. She went from being in the "Quarter of Death" to a potential favorite to win.
Is that any different than the way no one liked the market back in late May, because it was in the "late stage" of a bull market? Then the Fed pivoted. Trade talks reignited and without earnings even changing -- or interest rates for that matter -- we were at 2.1% on the 10-Year in late May and we're at 2.05% now, which isn't an outsized move. Stocks went from a bad draw to a good one.
Late last week folks got a bit over-exuberant about stocks though -- like Serena becoming the favorite to win now -- when the Investors Intelligence bulls moved over 55% and the Daily Sentiment Index (DSI) for the S&P 500 tagged 90 while Nasdaq's tagged 92. These short-term indicators have now cooled quite a bit with the S&P's DSI now at 75 while Nasdaq is at 80.
We got two down days and we're hearing all sorts of cautious chatter. It's like Serena is now playing her quarter final match, and is down a set so folks are concerned she can't come back and win. I know this about sentiment, because we went from put/call ratios for the exchange-traded funds under 100% for two-straight days and Monday saw it move back up to 120%.
Even if the market rallies one more time this week (due to the newfound cautiousness I would think it ought to), I will not change my view that we are getting overbought and sentiment got too hot late last week. I have my eyes on the McClellan Summation Index, because while it is still rising, it won't take much to halt the rise. And unlike when it did that a few weeks ago, this time it would do so heading into an intermediate term overbought reading.
And Serena? I think she wins it all.