My mentor in this business used to say if the Market Gods tapped you on the shoulder and told you we were within 5% of the highs, you would sell everything. The problem is, the Market Gods don't do that. They don't even ring a bell.
I have said many times before, and will reiterate, that I will have no idea that we are at the top until well after the fact. I can tell you that heading into the 2000 high I was not bullish. I can tell you the market was filled with negative divergences and too bullish sentiment. I can also report that I felt the same way at the 2007 high. But did I know that those two highs would be "it"? I had no idea. I won't even pretend I did.
That means I have one promise to you now: I will not know when we are the top this time, either. I do hope I will at least be cautious at that point. I do hope it will be one of those times where there are negative divergences and sentiment is too bullish, so that at least the warming signs will be present.
I bring this up, because there is so much talk now about stretched valuations, ebullient sentiment, and we all know the small caps have been lagging. The Russell 2000 is at the same place it was in early February. But we've seen that before, and it hasn't been the top, has it? I will know after the fact.
The curious part of this latest pullback that most of you will mark as starting on Monday -- if it continues, that is -- is how much leakage there is underneath. Look at the chart of Invesco Solar (TAN) , an exchange-traded fund to be long solar stocks. You do remember when solar was hot? I mean between November and January, TAN nearly doubled.
The decline off the February high was like an earthquake as it collapsed 20% in a matter of a week. ("A" on the chart). The early March decline ("B" on the chart), which was also about 20%, took place in a week, as well. But in the last five weeks, the 20% decline has been slow and grinding. Like it is nickel-and-diming you, all the way down.
The good news is that it hasn't broken down under support, but, as you can see, this chart shows what has happened to those hot stocks under the surface.
XBI (XBI) , an ETF for biotech, has a different shape to the chart, but the initial decline, which took three or four weeks to complete was down nearly 30%. Since the high in mid-March it's about another 10%, but in very grinding fashion. Yet, notice XBI also hasn't broken. It's just leakage and dripping every single day.
April has seen the big-cap indexes rally hard, but the small caps are flat as can be on the month. Here, too, look at Russell 2000 fund (IWM) , refusing to break $220.
So, sure, we got the expected pullback on Monday in the big cap indexes, but as you can see it's been a grind in the small cap world for a while. Yet, they don't break, so you only notice it if you own them. Perhaps that's why some sentiment shifted a smidgen on Monday.
Last week it was all fun and games, but Monday we saw the put/call ratio zip up to .89, the highest reading since March 30. The ISE call/put ratio (so low readings tell us a lot of puts are being bought) chimed in at 84, which is the lowest reading since Nov. 11.
I am still in the pullback camp, even if we rally on Tuesday, but that grinding we've seen all month in small caps has moved the Nasdaq Oscillator back to, an oversold condition.