Was it just two days ago folks were talking cautiously? It was. And I'll bet you wondered what I was talking about when I said we'd likely see more enthusiasm and euphoria. Somehow the market delivered, and so did sentiment.
Let's begin with the good news. The good news is that the 10-day moving average of stocks making new lows continues to retreat. The good news is that while breadth wasn't terrific, it was good enough to get the McClellan Summation Index rising again.
But there's bad news, too. The bad news is that one day of net breadth at -500 and it will halt that rise. That's not a big cushion, when the market is at all time highs.
As for breadth, we saw the New York Stock Exchange with +725 net advancers minus decliners which is OK. But to put it in perspective, on June 27 the S&P 500 gained 11 points and net breadth was +1,250. Wednesday we had the S&P up 13, with worse breadth.
The number of stocks making new highs did increase vs. the rest of the week, but not enough to exceed the peak reading thus far. So, this divergence remains in place, with the prior peak at 323 new highs and Wednesday's reading at 261 on the NYSE.
Nasdaq did not fare any better. In fact, Nasdaq had fewer new highs than it had a week ago and Nasdaq made a new high.
But the real change came in the way of sentiment. I even heard one Wall Street strategist, who a month ago said we were set to test the December lows, now calling for 3500 on the S&P 500. OK, we all know this is clown-show stuff, but seriously, talk about jumping the sentiment fence!
We saw it in the options ratios, too. The put/call ratio for equities was 51%. As a reminder, a reading under 50%, and I consider it bearish. Therefore this reading is simply low. The put/call ratio for exchange-traded funds was 88%. This means four of the last five trading days have seen this indicator under 100%. That too is a sentiment shift.
But it was the put/call ratio for the Volatility Index that really shows the shift. It was 119%. Triple digit readings to me are outliers for this indicator. A reading under 20% tends to be bullish for stocks, because it means there is too much call buying for the VIX (higher VIX, lower stocks). So a reading over 100% is a heavy bet that the VIX is going lower (lower VIX, higher stocks).
This has happened five times in 2019. The chart below shows the five times. Point A was the last day of January. We did rally and then promptly gave that last little rally up for a day or two -- probably just enough to get the VIX going up, not down. Point B was mid-April, and you can see we kept going up. But what you don't see is that's when the McClellan Summation Index rolled over. Point C was actually two such readings, two days apart. And point D gave way to a fast 100 points on the downside in the S&P.
I still think we're heading to an overbought reading later this week/early next week and I think sentiment is getting a bit frothy.