The sentiment definitely changed last week. I think it began on Wednesday when Fed Chair Jerome Powell spoke and the market fell. That was the first day in more than a month, despite the terrible action in stocks in general, that the put/call ratio even flirted with a reading over 1.0.
Since then we haven't seen the total put/call ratio under 1.0. Friday's reading of 1.15 is the highest such reading since spring 2020. In March 2020, this metric reached over 1.8, which I still believe is the highest such reading on record. Notice that there were many readings over 1.2 in that period.
Even the equity put/call ratio soared on Friday, this time to 0.74. For this data point, I need only to go back to just prior to the 2020 election to see a similar data point (in other words, there are many higher such readings, but this one is still quite high and shows the shift in sentiment).
This is just one way we know that my sense last week, after Wednesday, was that we had a Realization Day, when folks realized why the market is going down.
The 10-day moving average lines of these two sentiment readings are finally on the move. I have been railing that the total put/call ratio's 10-day moving average couldn't even stretch up over 0.9 (it was 0.98 in September/October) but the last few days has finally taken it up to 0.92. With all the damage that has been done under the hood it is my expectation that no matter what the market does in the coming days this will move further upward considering we still have three readings sub 0.90 to drop.
In other words, last week we saw the complacency leave the market and the bearishness finally creep in. Is there panic? No. But there is definitely gloom where there wasn't.
We can also see the sentiment shift in volume terms. The volume in the PowerShares QQQ Trust breached 100 million shares on Friday, something it hasn't done since last spring. It is my contention that volume in the QQQs gets high in downdrafts because the fear of losing money almost always outweighs the fear of missing out on the upside. High volume declines tend to lead to short-term rallies as you can see on the chart.
We all know the market is oversold on a short term basis. You see it on my Oscillator chart. But I ask you to squint and notice that the Oscillator barely ticked down on Friday. That's the oversoldness.
We've discussed the Hi-Lo Indicator quite frequently lately so I will report that Nasdaq's is now at 14% and the NYSE is at 24%. Just a reminder here that as you can see, March 2020 was rare because it is the only time we didn't 'double tap' down there, meaning a rally off the extreme oversold and then back down is commonplace.
But now we have another intermediate term indicator that is heading into oversold territory: the Volume Indicator. It is currently at 43%. It bottomed last summer at 44% but prior to that we have to go back to March 2020 to see it lower. Even in bear markets this metric hasn't gone lower than the upper 30s/low 40s. I expect it to get to an extreme oversold condition in the next 1-3 weeks.
Breaking a level that everyone is watching closely is what often brings about panic. Remember when everyone was so excited about the big breakout in the iShares Russell 2000 (IWM:NYSE)? Now all we hear is 'false breakout'. Will IWM get saved or will it bring us some panic? A break now already has the indicators at the bottom of the page, not the top.
Finally, the Russell Momentum Indicator is getting very interesting. I did a 'what if' exercise and walked the Russell down 100 points this week, thus breaking the well-watched line. And what did the Momentum Indicator do? It went up anyway. A break with some hysteria would feel a bit late in the correction, not fresh.
