Last Tuesday, after a harsh three day decline that had essentially erased November's rally, we had gotten oversold. We also saw the put/call ratio zoom up to 113%. All of a sudden folks were concerned, after being complacent the week before.
The Daily Sentiment Indicator (DSI), which had cranked up to 91 for Nasdaq just prior to Thanksgiving, had backed off to 60 by Tuesday. It now stands at 77, which isn't extreme, but you can see the two sentiment resets in the course of a week: 91 to 60 to 77.
Then there is the put/call ratio. That dipped down to a very neutral 88% on Friday, but that is the lowest reading since Nov. 18, so that too shows a swing in sentiment. I am still in the camp that we should get another pullback, perhaps this week, likely providing yet another reset.
As for a more intermediate-term basis indicator, take a look at the 30-day moving average of the put/call ratio. It has turned up, usually a sign sentiment is too complacent.
The Equity put/call ratio's 30-day moving average is still heading down. It now resides at 58%, a rather low level. Thirty trading days ago was late October, so we could see a turn upward in this indicator in about a week or so.
In the meantime, the ratio of small caps to large caps -- in the charts of iShares Russell 2000 Index (IWM) vs. the SPDR S&P 500 exchange-traded fund trust (SPY) -- has still not crossed the downtrend line on the chart I showed here on Friday. While I know everyone is quite excited over small caps (see Barron's cover this weekend lauding them) I would like to turn your attention to some other ratio charts.
For the past two years, the large caps and specifically the PowerShares Invesco QQQ Trust (QQQ) names (think Apple (AAPL) and Microsoft (MSFT) ) have been the leaders. Yet I noticed something, they have not been leading the charge in the last month as they had been. They did lead off the early October low, but notice how vs. the SPY they have been stagnant for six weeks. Also notice that this is the area where the outperformance has stalled for the last two years.
Even when we look at the small caps relative to the QQQs, we see there has been no lower low since September. Can they move over that downtrend line?
We all know how awful the oil stocks have been -- but notice that Energy Select Sector SPDR (XLE) relative to the QQQs stopped going down almost a month ago. This is a very fragile situation: Al we can hang our hat on is the fact that there has been no lower low, but perhaps these charts are telling us that maybe those big cap tech stocks are due for a rest when it comes to outperformance.