Let's talk about breadth. For eight of the last 10 trading days, breadth has been positive. That means breadth has made a new high while the S&P 500 has not yet done so. It also means the McClellan Summation Index is rising.
Over on Nasdaq, where we have not seen consecutive green days for the index since May 13-14, net volume (up minus down volume) has been positive for the last nine trading days. That means the Nasdaq McClellan Summation Index using volume is heading upward for the first time since it rolled over back in February.
Yet, so far, none of this has translated into stocks making new highs. That has remained incredibly mediocre for quite some time.
A few weeks ago, I thought we could see the growth stocks rally. They have. But can they continue? Friday they were pretty much the only game in town and at that they were selective. Look at the potential head-and-shoulders bottom on the Invesco QQQ fund (QQQ) . I drew this in a few weeks ago, and it is mapping out, but it stalled Friday right near the neckline.
Then there are the bonds. One of the reasons I thought we could see growth stocks rally was because I did not think bonds were set to collapse. I thought we'd see interest rates stay in a range. On Friday they, like the QQQs came right to the line. That line around 1.50% on the yield of the Ten Year must clearly have all eyes on it.
About two weeks ago, the last time yields got here the Daily Sentiment Index (DSI) was in the 80-plus area, so it was my contention that if yields broke down it would likely be a false breakdown, because sentiment was too stretched. But this trip down, the DSI is only at 67 so there really is room for a break of 1.50%. And a break of 1.50% is helpful to growth stocks.
The biggest challenge the market has is sentiment. One day last week the put/call ratio for equities was .37, which is the lowest since February. That's a yellow flag. The National Association of Active Investment Managers, who saw their exposure at 44 a few weeks ago are now back to 83.5. Readings over 90 are cautionary and readings over 100 lately have been negative. So the runway is short here.
The DSI for the Volatility Index is back at 19. That means if we see much more rallying from here in stocks and the VIX falls the DSI will fall and become a warning flag as well.
My weekend Twitter poll shows 63% looking for more upside in the market. This is the highest reading since early April. Early April saw small caps rollover and Nasdaq and the S&P stopped about a week later.
The results are in!
Thanks everyone for your participation!!!
This is the highest reading for 'up' since 4/1 when we had 68%. pic.twitter.com/0cQgkwiL3X— Helene Meisler (@hmeisler) June 5, 2021
Finally, last week I noted the 10-day moving average for the put/call ratios should fall to the bottom of the range (they have), but now I expect these moving averages to bottom out and head up later this week. When heading down it is supportive of the market and up is not.
The bottom line is breadth is good and therefore supportive of the market, but sentiment is not cautious the way it was a few weeks ago. In fact it is just a few steps from giddy again.