We saw some changes in the indicators since I last reported on Thursday morning, so let's break them down.
We'll start with breadth. The indicators here are still rising. It was a little dicey on Thursday with the down move, but it turned out to be a shakeout. And, boy, did folks get bearish in a hurry that day. The put/call ratio zipped right up to 116%. That's incredible for a mild down day.
But the number of stocks making new highs for Nasdaq finally increased over the July reading. The New York Stock Exchange did not have as good a showing. It's still showing the number of new highs as fewer than prior times in 2019. So good for Nasdaq, not so good for the NYSE.
Now back to sentiment. You see that is where the real change has occurred. After Thursday's shakeout and bearishness, folks have started to border on giddy. They are not quite there, but they are now knocking on the door.
The put/call ratio for Monday was 65%. This is the first reading under 70% in almost two years. How's that for a change? Let's take a look at when we saw the last three readings under 70%. There were two in January 2018. The first was early in the month and the second was late in the month. Clearly the one late in the month was more important than the one early in the month.
Prior to that was one around Thanksgiving 2017. Let's take a look at the chart of the S&P 500 from that time. The blue arrows represent the three instances. With the first two, the market went into a chop mode for a few days. It did so with the last one as well, but four days later the blow-off top was all we had.
Now let's take a look at the 10-day moving average of this indicator. The two green arrows represent the first two arrows on that chart above. So our takeaway is it was a one-day reading, but the trend was that sentiment in general wasn't that giddy.
Now look at the current situation: The 10-day moving average of the put/call ratio is kissing 85%. This is the lowest area we've seen in the last two years for this indicator. To go much lower than this mid-80s level, we have to go back to late January 2018, when the moving average was at 76%.
Let me point out that in late January 2018, the McClellan Summation Index had been heading down for a few weeks already and the number of stocks making new highs had been contracting since mid-month, not to mention breadth was pretty poor. None of those conditions are in place right now.
Sticking with sentiment, the Daily Sentiment Index (DSI) for Nasdaq is now 86. The S&P has 83. Getting over 90 has rarely been a good time to add to positions. The market doesn't always back off immediately once these get to 90, but within a few weeks, we typically see some sort of correction.
I expect the Investor's Intelligence bulls will be well over 55% this week when they are reported Tuesday evening. If that is the case, then we will have sentiment too bullish, but we won't have the indicators rolling over. If the indicators start to roll over, that would be a reason to be cautious. Otherwise, it's more likely we just see a pullback or chop to relieve the bullish sentiment.
