I like to watch sentiment, because I think at times it can provide a good insight into markets.
This week, I noticed, even the bears lifted their targets for the rally just a little. I think that is because last week's oversold rally might have been faster, or stronger, than they had anticipated.
But the other side of that is that I see fundamental folks have gotten more bearish, if that is possible. Folks who were more middle-of-the-road two weeks ago -- before the rally -- have notched up their bearishness. I don't know what to make of it, but it tells me that on some level we are unlikely to get them back on board unless there is a change by the Fed.
As I have noted before, it is my impression that we tend to get "V" bottoms when the Fed is easier and when the Fed is not so easy we get more "W"s, or more drawn out ones. So, was this a "W"? I'd say it was more drawn out. But rather than focus on what already happened, stop and look at what lives above: That is resistance.
The only way I know to get through resistance is to eat through it one bite at a time. So, for all those folks who think 4,200-4,300 is resistance on the S&P, yes you are correct. My question is how do we eat through it?
I think the market is short-term overbought. I think it should back off, whether we're at resistance or not. I think breadth has been good for about three weeks now (since mid May) and so we ought to see the pullback in breadth. Tuesday was part of that action.
Tuesday's breadth wasn't great, but it wasn't awful, either. It was enough for us to see the Oscillator tick down. It was enough so that the McClellan Summation Index is still rising, but what it will take to turn it back down has backed off from a net negative breadth reading of 7,000 to negative 5,700. I would like to see that get down to a much more normalized reading under negative 4,000 or even less.
So, why do I think we're apt to see a pullback and another rally? Because the intermediate-term indicators are not yet overbought. For example, the 30-day moving average of the advance/decline line is not yet overbought.
Another indicator that is not yet overbought is the Hi-Lo Indicator. The New York Stock Exchange is at .21. I would say over .25 and it is no longer oversold but probably needs a higher reading to get overbought. However, you can see that once it turns, it tends to zip upwards in a hurry.
That leaves us with a market that is short-term overbought, has resistance not far overhead but ought to pull back, and then make another rally attempt.
One final note on oil. The Daily Sentiment Index (DSI) got to 92 late last week and you can see energy stocks rallied and reversed on Tuesday. That to me is part of the overboughtness and I would expect we'll see energy cool off and then rally again, as well.