Perhaps it's been a long time for many of us, but try and remember the early days of a new relationship, and all the emotions that go along with it. Does she like me? Did I say the wrong thing? Should I do this? What if he does that? C'mon, you remember, all the highs and lows that accompany a new relationship.
That's how the market feels now. Let's recap: In late May, there was so much bearishness we could cut it with a knife. The put/call ratio had soared to 140%, the highest reading since it was 180% in December. The American Association of Individual Investors saw the four week moving average of bears up near 40% -- the 4-week moving average, so you know it was persistent. There was so much angst in the relationship investors had with the market.
Then we rallied and there was minor acceptance of the rally. Until last Thursday. That's when we made the new high, and the put/call ratios started to fall. And it was like investors had kissed and made up with the market. Having decided the relationship would last, they took the put/call ratio for exchange-traded funds under 100% for three-straight days, despite the pullback in the market.
Then Tuesday's decline arrived, and the new love affair was back to turbulent as folks sold their beloved winners. Yes, I'm looking at you software stocks. They also started to buy puts again as the put/call ratio moved up to 98%. It truly is an emotional roller coaster.
Even the Investors Intelligence bulls who had been at 56% in late April and came down to 42% in late May are now back to 53%. These folks rarely jump around this much, but this relationship is fraught with emotions as you can tell.
We got overbought last week. Sentiment got a bit complacent, and now we've spent three days pulling back. The S&P 500 has not gone past three days of red since early May. My work says we won't be back to a good oversold until near the July 4 holiday. That doesn't mean we have to go down every day until then, and that would be a big surprise to me if we did. It's more likely we have an up day then, another down day or two, and so on, likely continuing this turbulent relationship investors have with the market, as we work our way toward another oversold condition.
Both the S&P and Nasdaq have gaps just below where they closed on Tuesday. I don't know if they fill them on Wednesday, but I suspect in the next week these gaps will get filled and perhaps that will correspond with an oversold condition, keeping this emotional roller coaster relationship alive.