I said last week that this current market could play out somewhat similar to last fall's. I want to take some time to dig deeper into that possibility.
First, let's note that the S&P had its first five-day winning streak since August and the Russell 2000 had its first five-day winning streak since May. The Russell hasn't gone to six days since April 2020. It doesn't tell us anything earth shattering, except that we have changed a pattern that has been in place for several months.
Last summer the McClellan Summation Index peaked in August. The major indexes kept ramping upward. The S&P tacked on nearly 200 points and the Summation Index ignored it and headed down. The September peak pushed the indexes down as they followed the Summation Index (as a reminder the Summation Index tells us what the majority of stocks are doing).
Stocks bottomed in mid-September as the market got oversold from that decline. Remember at that point most stocks had been flat to down for almost six weeks. We enjoyed a terrific oversold rally until early October and the Summation Index turned upward. Breadth was terrific for that rally -- so many stocks had gone down or nowhere for months by late September. Then we peaked in early October and rolled back down.
Notice that in the current environment, the rally in early January did not lift the Summation Index but it did turn upward last week.
Sentiment was pretty sour at the September low and it got quite enthusiastic at the October high only to get sour again at the trip back down into late October. I have boxed that time period off on the chart.
Now take a look at my own Overbought/Oversold Oscillator from that time period. Oversold at the September low, a nice push to overbought in early October and back down to an oversold condition in late October. The "W" pattern is quite obvious.
In today's market, we have the oversold condition from last week that is now heading toward an overbought condition. I expect this oscillator will be back to overbought by the end of this week. It's hard to determine exactly how high up it will go, but unless the market falls apart in the first half of the week I think this could/should easily get up over 500.
There is another interesting tidbit. The Dollar Index. Back in early January I said I thought the dollar was due for a rally. It has rallied nicely and now it has pulled back. The pattern is not much different than it was in late September/early October, so if the DXY slips back under that line that too would be similar to the fall.
One of the keys is sentiment. Last week it was pretty sour. I noted my unscientific Saturday Twitter poll showing folks leaning negative by about 15 points. (In the poll, I inquire what direction you think the next 100 points will be; last week the downside was favored). So we were oversold with bearish sentiment.
The results are in!!!!
You guys are awesome for doing this each week. Thank you!!
My rough notes say last time we had +20 to the upside was early October.February 6, 2021
This week's poll is now skewed toward the upside. The spread is 21 points, which is really quite wide. If you are wondering the last time the spread was that wide, it was at the early October high, well a few days before it.
We also saw Nasdaq's Daily Sentiment Index (DSI) at 91 on Friday. The Volatility Index is at 15. I do think by the end of this week we'll be back to overbought and now short-term sentiment tells us folks are enthusiastic again. I think we're just looking at market swings now.