Not only did we finally log in a green day after four-straight red ones, the Russell 2000 was the leader.
Perhaps it was because it has been such a dog or perhaps it was because sentiment had gotten too negative on it, or maybe it was due to the Russell 2000 rebalancing that takes place on Friday.
There are a host of rationalizations for the move, but I prefer not to rationalize an indicator. It rallied and the rally was much needed.
But did Thursday's rally change my indicators? Not much.
So let me take some time to answer a question that seems to be clogging my inbox of late. Here's one: What does the market have to do for me to change from "pullbacks should lead to another rally" to "rallies should lead to another decline"? Well, for me it's always about the indicators.
Let's take the number of stocks making new highs for example. Last week it peaked at 323 new highs. I said at the time it was impressive. When new highs are expanding, it's generally good for stocks. The names on the list were concentrated in defensive names, utilities, real estate investment trusts, and software stocks. If for some reason those stocks do not rally the next time we go up (yes I am still assuming there will be another rally), then it is likely that the number of stocks making new highs will not confirm and we will have our first negative divergence in stocks making new highs.
The number of stocks making new lows has been contracting, but quite frankly with the indexes at new highs, typically the new lows should be closer to single digits and not hovering over 50 on the New York Stock Exchange as they have been this week. The 10-day moving average of new lows is still heading down for now.
Nasdaq, despite the rally these last two days, still has more new lows than new highs; its 10-day moving average of new lows has not turned up though. In any event, should this indicator start heading up instead of the current down, that would be concerning.
The McClellan Summation Index, which tells us what the majority of stocks are doing, took a breather this week and flattened out, but has not rolled over. It would need a net differential of -900 advancers minus decliners to roll over. Should this indicator roll over and start heading down, that would be concerning.
I have discussed sentiment, and how I am waiting for some Euphoria. Maybe we never get there. After all the American Association of Individual Investors survey shows no change at all this week with bears still numbering more than bulls. However, the Investors Intelligence bulls are now 53%, so it wouldn't take much to push them up over 55%, would it?
The 10-day moving average of the put/call ratio is now low, but not yet turning up. Of all the sentiment indicators I follow, this one is the closest to complacency, so it's worth watching.
I have no inkling what will transpire over the weekend nor do I have any idea how the market will take it. What I do know is that if we do sell off, it would lead us toward oversold later in the week. Such an oversold condition should lead to another rally. But if the above indicators are diverging if or when we get an oversold rally, then I would probably shift my view.