The sentiment debate rages on.
There are still those who cannot understand why certain sentiment indicators do not show giddiness. So, many continue to scratch their heads when they look at the Citi Panic/Euphoria Model. If you look at the way the majority of stocks have acted in the last month, you would fully understand it.
You can see the model remains firmly in Panic territory.
Then you look at the McClellan Summation Index and see that since mid April it has been heading down. That's what the majority of stocks have been doing. The indexes have levitated, but they have done so - as we all know - on the backs of a handful of stocks.
So if you look at the majority of stocks, then that Citi Panic/Euphoria Model makes a ton of sense.
Now if you squint really hard you can see that the aforementioned Summation Index did turn up on Friday. And it did so just as the S&P 500 reached resistance at 4,300, the August high.
So how do we square this with the giddiness that has developed in the index movers, in the narrow tranche of technology stocks? First of all, let's acknowledge that there is an awful lot of giddiness there in technology stocks. We see it clear as day in the Daily Sentiment Indicator (DSI) which saw the CBOE Volatility Index finally get to single digits on Friday, when it clocked in at 9.
We see it in Nasdaq's DSI as well, which chimed in at 88. That means the spread between the VIX DSI and Nasdaq's is at 79 which is pretty high. It got to 84 at the November 2021 high. Curiously, if you look at the ratio of the iShares Russell 2000 ETF (IWM) (small caps) to the PowerShares QQQ Trust (QQQ) (big cap technology) you can see the divergence is greater now than it then (blue arrow on the chart).
I am pleased the down and outs finally rallied, especially energy and banks which are the groups I thought were most set up to pop. To me that is bullish for these groups but the DSI is bearish for tech and the indexes, particularly Nasdaq.
Now take a look at one other ratio chart. The Semiconductor Sector (SOX) to Nasdaq. That turned down a week ago, just before Memorial Day. Peaks in this ratio have often seen tech stocks underperform while troughs have seen them outperform.
The bottom line is I am not sure the divergences will go away, it just may flip over for a while. The message of the market for the last two years has been don't fall in love with the bull case or the bear case because just as you do, the market manages to find a reason to go the other way.