For months I have said I think the major indexes are in a sideways mode. But after last week's drubbing, I was asked if there was a change in my view. So far, there is not.
The market has kept the either/or aspect intact. Unlike the summer of 2020, when the reopening stocks took the entire summer off and the only game in town was growth/tech or in nearly two months or so after the election, when growth sat it out and the reopening stocks took the lead, we have not had a sustainable trend in one group or the other. We have moved back and forth between overbought and oversold and group rotation.
Let's just use the Bank Index and the Invesco QQQ fund (QQQ) to look at this more closely. If we step back we see a low in the Bank Index in late January and a high in early May. But take a closer look. The low in February preceded a peak in the QQQs by a few weeks, so while banks enjoyed a terrific February tech/growth did not.
Now, look at that low in the QQQs in March, it was about a week before that spike high in the Bank Index around 126. Then the banks took a month off, while the QQQs screamed upward in early April. Banks sat there in May, having peaked, but not going down, while the QQQs took a dive. Then the QQQs rallied, but the banks sat there. Finally last week the QQQs sat there while the banks took a dive.
That has been the story of this market this year, at least to my eyes. And that is why I believe the major indexes are so flat since the spring. If this sort of rotation changes then I believe the market will change.
If we look at the chart of the iShares 20 Plus Year Treasury Bond fund (TLT) as a proxy for the bonds we can do some basic technical analysis for a measured target. We measure the top of the pattern ($140) and subtract the bottom of the pattern ($134) to get six. We then add six on to the breakout at $140 to get $146, which was achieved late last week. The Daily Sentiment Index (DSI) for bonds was 83 on Friday, so I suspect somewhere in that area in the mid-$140s is what will be "it" for TLT (bonds).
Back in late February the DSI for bonds got to single digits, TLT rallied, came down to a marginal lower low and moved upward gradually over the ensuing months. So, TLT might return to that mid-$140s area and make a higher high, but like the March low, I would expect it to be marginal at this point.
That probably means the growth/tech stocks have some energy left in them, but not what they had a month ago when TLT was $136.
What surprised me the most about Monday's oversold rally was that the put/call ratio did not slide lower, but rather remained elevated at .83. That is quite different than the anecdotal evidence I saw all around me where folks seemed pretty complacent and well, relatively bullish.
I will finish by noting that the DSI for the VIX is back at 20, where it was just prior to my vacation. If the oversold rally goes much more and the VIX falls, the DSI will get back to a critical level quickly (i.e. another set up for a pullback in stocks and a rise in volatility). That's why we continue sideway,s because the market is in the mode where nothing is allowed to get to an extreme.
