I found myself reading my mentor, Justin Mamis, and his special report on the "Philosophy of Tops" on Wednesday. It was written in July 1987, about a month before the high in late August that year and 10 weeks before the Crash of 1987.
There was a line in it that struck me, because it is so apt to the current environment: Tops seem to come out of nowhere, out of a glowing good-news climate. It struck me because just a few weeks ago when Apple (AAPL) pre-announced, saying its quarter would be weak due to the coronavirus and the market didn't die on the news, everyone began lauding the market for being able to withstand the bad news. I even wrote about it, noting that folks were acting as if the Fed had repealed recessions and downdrafts in the market, which seemed ridiculous to me.
What a turnaround we've seen in terms of sentiment in just a week. Now there are warnings from strategists of another 10% down, at least. Did these folks not realize there would be supply disruptions to the global supply chain two weeks ago? Isn't that exactly what Apple was telling us? Yet folks opted to ignore it and focus on their perceived good news of the Fed saving the world and the market.
There wasn't that much change in the market or the indicators after Wednesday's failed rally attempt. But let's take a look at the indicators that did shift.
Recall Wednesday we discussed the various indicators I use to determine overbought and oversold. Each day we have red breadth is one day closer to getting oversold with my Overbought/Oversold Oscillator. So in that respect, while Wednesday stunk if you were long, it was helpful in moving the market toward an oversold condition.
The Nasdaq Momentum Indicator, which did a good job indicating the overbought market two weeks ago, is now finally getting closer to an oversold condition. What I do here is I plug in lower closes for Nasdaq over the course of the next eight to 10 trading days to see when a lower close no longer matters and the indicator turns up instead. This is not meant to catch the exact date, but to give us a window of a time frame. In this case, it turns up on Tuesday.
As noted above, sentiment is really starting to shift as well. Oh I don't think we have had true panic, but now everyone seems to be waiting for the other shoe to drop. The CNN Fear and Greed Index is at 21. In mid-January it was over 90. So that's a switch.
The Daily Sentiment Indicator (DSI) for the S&P 500 is now at 22. Five trading days ago it was 69. Nasdaq's has fallen from 73 to 25. So that's another switch. If these readings get to single digits I'd call it extreme. And bullish.
For now, there isn't much change in my view. I think we can/should bounce, but I think we'd have to come back down again after that since the intermediate-term indicators are not yet oversold.
Note: My mother (who has not yet called about the market) is visiting, so my next column will be Monday.