My last several columns have discussed the sentiment of stocks as well as bonds quite a bit. Today's column will be no different. You see I believe the last week or so in the market was less about how stocks were acting and more about sentiment.
Think about it: the stock market had fallen by 5% nearly two weeks ago, but the last week or so it did a lot of milling around. Up until last Wednesday, the S&P 500 had not put together two consecutive days or up or down in a week. There wasn't much to say because the action was simply driving the intermediate term indicators toward an oversold condition.
Yet the bonds kept falling -- right through that 4% level for the 10-Year. And it was the bonds that turned sentiment so sour, not stocks. Recall that I sensed by Thursday we were at a Bond Realization Day, that's when folks realize why the market is moving in the direction it has been. I even joked about the Treasury Direct website getting so much airtime.
This weekend, I saw that the Delta Market Sentiment Indicator changed. I do not discuss this indicator much, if at all, but it is based less on sentiment and more on the action of individual stocks. The folks at Delta Management calculate a MACD (Moving Average Convergence Divergence) crossover indicator. Their thinking is pretty simple: if the crossover is over 50, they are bullish and if it is under 50 they are bearish.
They literally are either 100% in cash or 100% in stocks. I like it when I see them get to 100% cash because we are usually at the end of the decline. To me it's because it means stocks are oversold on an intermediate term basis using their methodology (since their indicator is based on MACD which is an oscillator and not really a sentiment indicator as they call it).
In December, they never went to cash. But this last week they did. Prior to that they went to cash in early October.
Then there is the Citi Panic/Euphoria Model. Its range has been quite tight in the last nine months (zero to -.2) so there hasn't been that much to cite in the chart. However, I noticed that it did not come down gradually in February the way it meandered its way lower from mid November to late December but rather it took a steep dive, covering the zero to -.2 range rather quickly. That is how quickly sentiment shifted in late February.
Will the rally that began late last week continue? Hard to say. There are a lot of market moving items on the agenda for the week and the Daily Sentiment Index for the VIX is back to being a teenager at 17 so if the rally continues for a few days we are likely to see the DSI for the VIX fall quite low, indicating a bout of volatility heading our way. However with sentiment having gotten so bearish and stocks already down, a bout of volatility should only serve to get the intermediate term indicators further into oversold territory.