What a difference a few days make. Three weeks ago, folks were rather glib about the decline. Now they are getting more concerned. So, it got me thinking about the Sentiment Cycle I have showed here so often this year.
I'm not sure exactly where we are in the cycle, but I do know we got to Enthusiasm in mid-July. That was when the Investors Intelligence bulls tagged 58%. That was when the 10-day moving average of the put/call ratio was, oh, so low. And that was, as you might recall, when everyone viewed the Fed cutting rates as a big positive for the market.
The reason I am unsure where we are is because I don't think we've gotten panic. I suppose it's possible we don't, but we do seem to always get some version of it. If I had to guess, panic could arrive if the 2-year/10-year yield curve inverts, since it is awfully close to doing so.
So let's move away from the news, and look at the indicators. We are heading back to an oversold condition. I won't walk us through the math on my Overbought/Oversold Oscillator again, but note that beginning Wednesday, we should drop a string of red numbers and that's what makes us oversold. It need not be the exact day, but it should be close.
TRIN, the Trading Index, was 2.41 on Monday. This is the highest reading since early December. It shows there was a good deal of selling on Monday and, remember, selling is what takes us to oversold readings. Buying doesn't get us there.
Then there is the Nasdaq Momentum Indicator, which reached an oversold reading last Thursday. Now, when I walk Nasdaq down an additional 250 points in the coming week, you can see the indicator moves up and stays at higher lows. Again, that's what makes it oversold.
So, yes, I think we rally again this week.
But what of the intermediate-term? The 30-day moving average of the advance/decline line is not oversold. I'd love to tell you when I see it getting that way but so far the math just doesn't show it. You can see the overbought reading (blue line) in mid-July, but you can also see it hasn't even gone under the zero-line yet.
Just going under the zero-line is not what makes it oversold. It's the math, the same as the Oscillator. I need to be able to see a long string of red breadth numbers to drop ahead of us, and I just don't see that, yet.
The Hi-Lo indicator for Nasdaq is now at 34%. It got down to 30% in May. Under 20% and it is very much oversold. So it's trending that way, but is not there yet. The first thing that needs to happen is the 10-day moving average of new lows has to stop rising (recall it started higher in mid-July).
On the sentiment front, the 10-day moving average of the equity put/call ratio has moved up higher than it was in May. It is possible this peaks later this week. At least that tells us there is a real shift in sentiment taking place.
For now, I'm in the same camp I have been: We should rally again but I think we come back down again.