This oversold rally continues to be nothing to write home about. That must be why sentiment continues to scoff at it.
For the sixth straight day the put/call ratio was over 100%. To put that in perspective, we saw 10-straight readings over 100% in December. And that decline was a lot more than the 5% pullback we've seen now. Think about it: The S&P 500 has rallied almost 2% off the Monday morning low, and folks are still loading up on puts.
In fact, the equity put/call ratio was 77% on Wednesday, so consider that we went from March 29 until May 9 without a reading for this metric over 70%. Since May 9, we have had five-straight readings over 70%, despite the two-day rally.
I get it. The news is so awful I wish I could mute it all. We've got a trade war with China, we've got Middle East war chatter, and we've got some economic data that isn't exactly ripping the cover off the ball. If it wasn't for all the other news, I'm sure we'd hear non-stop about the yield-curve inversion. But stop for a minute and remember that not quite two weeks ago, we had an employment number that made everyone so happy, the lowest in nearly 50 years.
I think it tells exactly what the sentiment readings told us at the time: Folks were simply too complacent. So, when we did get a bout of bad news, it became a scramble for the exits and a rush to buy puts. At some point the put-buying will exhaust itself, and the 10-day moving average of the put/call ratio will peak and roll back over.
The Investors Intelligence bulls did back off, about four points to 51.4%. This is the lowest reading since mid February. There is nothing extreme about this reading, but it shows the shift in sentiment is now taking place in the weekly surveys as well.
As for the market action, the fact that the banks and small caps pretty much sat it out is not encouraging. The breadth of the market, however, wasn't that bad at +900 for the New York Stock Exchange. The best news was that in the morning whoosh down, the S&P 500 got to 2815, and the number of stocks making new lows was about half of what we saw on Monday. Yet, we didn't break under Monday's low in the S&P of 2801, which would allow for a positive divergence.
A positive divergence is when the index makes a lower low and there are fewer stocks making new lows. That's what I call a successful test of the lows.
Yet, we are still in oversold territory, so if we see the market get hit again, I would expect another rally.