Let's talk about the banks. You may recall my first column in December discussed the chart of the Bank Index. I drew in the black line and said if this breaks, it's not good. The line looked as if it should break, because we'd already seen a lower high.
Then it broke and hysteria ensued. A bank industry conference was held and some CEOs made some negative comments and that was all that was needed to crush the banks and get folks upset. At the time, I said I thought we should see a bounce off 100. We did, and then down we went again. But look at the chart. That second leg down (from 105 to 97) was two days and then, while the S&P toyed with 3800, the Bank Index rallied.
In the last two days it has rallied right back to where it broke down from. No one seems upset with the banks anymore, in fact, I now see much love for them. I think that blue line is the best they can do in the near term. It's had a 7% rally in a bit more than a week. I am not bearish on the banks, but I just don't think we should be looking for a breakout right now.
In the meantime like it or not, and most don't really like it, we did get a Santa Claus rally (the official end of it was Wednesday). And you can see it mostly in the chart of breadth. Notice that breadth (blue line) has rallied to the equivalent of the S&P at around 3950 (brown line). Breadth tends to do much better at this time of the year -- during the Santa rally -- but this is quite an outperformance. Breadth has been positive for three of the last four trading days.
The better breadth has in turn gotten the McClellan Summation Index to turn upward, as well.
Then there is the Oscillator, which is now well above the zero-line. It's difficult to estimate when it will be solidly overbought, because we've had so much chop lately, but it will be slightly overbought by Friday. If we get a few more days of positive breadth then it will be fully overbought late next week.
The good news is that sentiment in terms of the Daily Sentiment Indicator is still bearish. The Nasdaq DSI is at 16 (up from 12 on Tuesday) and the S&P is at 19 (up from 15 on Tuesday). So if the market pulls back again, these are already so low that they will fall into the 'too bearish' zone quickly.
The S&P has been in a 100 point trading range (3800-3900) for nearly three weeks now. If it can crack over 3900 I suspect sentiment gets more friendly to the market. If it cracks 3800 then we already know those DSI readings will fall fast, setting up another rally.