I was asked early last week how it was possible we'd get sentiment shifted that quickly in a week, enough to see a market pullback this coming week. I responded: A rally should change sentiment. And as night follows day, that is exactly what happened.
We entered last week with the market having taken a hit the prior week on not one, but two days and one of those days was Friday. Sour moves into the final day before a weekend have a tendency to dampen sentiment. Recall I shared with you the Twitter Poll I had done where 61% were looking for more downside with a mere 39% looking for upside. Naturally we got a rally.
This week's Twitter Poll on July 4 showed a dead heat: 50-50. Just prior to the early June high we saw 51% looking for upside. So yes, this is a shift in sentiment.
The next 100 points for the S&P— Helene Meisler (@hmeisler) July 4, 2020
The Daily Sentiment Index for Nasdaq began last week in the mid-70s, but by Wednesday's close it had reached to 93. That did not change with Thursday's action (likely due to the late-day decline). The S&P's DSI is at 87 so there is still some room to move up a bit more. Keep in mind these are daily readings, so one down day can change the reading, but generally speaking over 90 and the upside gets limited, unless there is a pullback. So, yes, I still think we get a pullback this coming week.
Quite frankly, I would prefer to see a rally on Monday, just so we might get the S&P's DSI over 90, clearing out some of the negativity that developed with the late-day sell off before the weekend, but that is not a requirement.
That having been said, not much changed in the indicators for the week. The most positive change was that the number of stocks making new highs for the New York Stock Exchange finally lifted. Common stocks only made it to 59, which is the highest since the March decline. All NYSE stocks made it to 91, also the highest since the March decline. Nasdaq remains unable to surpass its prior peak readings.
Today I want to talk about some trendlines on the Nasdaq chart. We've been looking at that channel on Nasdaq, where that lower line continues to hold, but notice that since mid-June the upper line has not been tagged (blue lines).
Yet, look at the black line, which takes us back to the February high. To me this proves there is some very decent resistance for Nasdaq up here.
Now, if you take that black line all the way back to 2018 you can see it has kept the rallies contained. In February, it literally tapped the area and immediately went down, other times it took a while to correct much more dramatically. Either way, Nasdaq is just shy of that line. I would remind you of the discussion last week that I believe trendlines should be quite thick, because I should be able to see a rally or pullback with the naked eye, not having to squint.
I don't know if we can get the S&P to outperform Nasdaq for an extended period of time, but at some point, even this ratio gets a little stretched and needs some upside to relieve the pressure.