It's easy to be bearish right now.
Interest rates are still rising, after all they saw no let up last week, did they? And the Fed promises to keep hiking for the time being. The U.S. dollar, while it has backed off some last week, is surely still in an uptrend, right?
The economy, as much as employment has held up, seems to be weakening, as so many of the economic indicators have come down. And let's not forget the new mantra of how slow the housing market is now.
And while gas prices have eased considerably, we are bombarded with daily notes of how high rents are, which is a hefty component of the Consumer Price Index. Ahh yes, the CPI, which will be reported this coming Tuesday morning, is on everyone's mind.
Will it be lower than expected? That seems to be the consensus. Will it be higher? I am not an economist nor would I even attempt to play one on T.V., but I do know that if the CPI comes in hotter than expected and the market rallies there will be many who will be surprised.
I am not saying that's what will happen, but it is a possibility. It is something that would somehow or another change the gloomy sentiment, wouldn't it?
Sentiment has shifted a bit in the last week. After last Tuesday's failed rally, sentiment was so distraught that folks seemed to have forgotten how oversold we were. By the time Thursday rolled around and the S&P 500 had rallied nearly 100 points folks were reminded how oversold we were but that was it, this was just an oversold rally.
Then came Friday and the market rallied even more. So sentiment shifted a little more. Now a few bears had moseyed over to the fence to have a peek at the bulls on the other side. We know this because the Equity put/call ratio went from 0.75 on Wednesday to 0.52 on Friday. That's quite a change of heart. The last time we saw a low reading like that was mid-August. That's scary, isn't it? After all, mid-August was when the market peaked.
Yet look at a chart of the 10-day moving average of this metric. In mid-August, we had been rallying for two months and the chart shows a reading near 0.56. That means we had to have an awful lot of readings in the 50s to get the 10-day moving average down there. Now the moving average is at 0.74, the same place it was in May and June.
I think we can use a down day or two because we've come so far in three days, but my Oscillator is not even close to an overbought reading and it is my sense that sentiment hasn't shifted enough yet - too many bears are still lounging in the backyard, not interested in what is happening in the bulls' yard on the other side of the fence - that we would then rally again.
One final word on bonds and the dollar. I noted last week that the Daily Sentiment Index (DSI) on the buck was 93 and I thought within a month the dollar would be lower. It ought to tag that line. If it breaks it, that would be a big deal for the market.
On bonds, the DSI is 18 so how much more upside do rates have here? If rates go higher from here, the bonds will be a buy based on the DSI. The message is clear to me: Don't fall in love with your positions in a volatile market.