Let's talk about breadth, because it was the best we've seen in over a month. And it was the down-and-outers that led, which I think is a positive.
Was the good breadth enough to finally turn the McClellan Summation Index? Well, not quite. But it did stop going down for the first time in six weeks. That's good news.
The bad news? If the market turns south in the next day or so, the Summation Index will head right back down with it, so it's not out of the woods yet. But it is on the verge. What I find curious is that the news on the economy is so bad, considering the rising Covid numbers these last few weeks -- so the commentary is vastly different on these return-to-work stocks than it was six weeks ago.
Six weeks ago everyone was convinced the reopening of the economy was going to go swimmingly. Now, no one seems convinced of that, therefore so few trust the return-to-work stocks. There is probably some truth to that, but also some recency bias, because those stocks sucked folks in back in early June and then spent the next six weeks correcting 15%-20% at least.
So why, if there was improvement, am I even discussing that the market could turn back down?
Well, it's sentiment.
Forget the disdain for the return-to-work stocks and let's focus on the markets as a whole. The put/call ratio fell to 62%, which is the lowest since June 8, when it was 60%. The good news is that we needed two days of such low readings before the market peaked; the bad news is, the market peaked.
Let's add to that, that the Daily Sentiment Index (DSI) is now back to 89 for both the S&P 500 and Nasdaq, so they are now in lockstep in this particular sentiment indicator. Any rally in the next day or so would take these over 90, and, as we know, readings over 90 tend to produce pullbacks. Just remember Monday's reversal, since that was the last time we saw the Nasdaq reading over 90.
In addition the Investor's Intelligence bulls are at 58.1%, so a small nudge up from last week. At the peak in January they were 59.4%. Readings over 55% are yellow flags; over 60% and the color goes to red. With the back-to-work names improving as they have, it is possible we see a reading over 60% when these are released next week.
In sum, the improvement in the down-and-out stocks is a positive. That was option No. 1 from the discussion last week, but sentiment remains problematic as we see several indicators showing excess now. Of course, there is always the American Association of Individual Investors, which will be out Thursday morning. They seem to never get bullish anymore....