This is the part of the market I find so difficult. Last week it was clear: a big down day on Monday would lead to a rally. We had been down so much, we were oversold and sentiment was bearish. But now the big cap indexes have tacked on four straight days of gains.
That means sentiment is no longer as bearish as it was. But in the course of this rally, it has been so concentrated in big cap stocks that breadth is still poor. I mean how many times do you see the S&P rally. Heck, even the small caps were up 5% off the lows, and the McClellan Summation Index keeps going down? Not just down, but after four days of rallying it still needs breadth on the NYSE to be +1100 just to halt the decline? You don't see that often.
You know what else we don't see often? That would be a rally such as we had where the 10-day moving average of the equity put/call ratio barely budges to the downside. In fact, Friday's equity put/call ratio was .61. To put that in perspective, it was .69 last Friday and 'only' .53 after Monday. Just look at the chart. Prior peaks have turned south and just fell. Not this time.
We also don't tend to see the 10-day moving average of stocks making new lows stay elevated. Nasdaq's is still over 100. Let me remind you that Nasdaq rallied 4% from Monday's close through Friday's close. Look at the chart: typically it just starts heading down. Not this time. In addition, Nasdaq is at a new all-time high while the 10-day moving average of stocks at new highs isn't even at 100.
I'll tell you something else that doesn't tend to happen after a week such as we had. The Overbought/Oversold Oscillator, which is based on breadth not price, is still sitting under the zero line.
I look at the math behind these indicators and think they ought to start moving this week. But that requires better breadth participation. Nasdaq has gone up for four straight days. Would it surprise you to know it hasn't done five straight since late January? The Daily Sentiment Index for Nasdaq is back at 86. This occurs as we head into the earnings for the big mega cap Nasdaq names. It doesn't scream 'great set up' for more upside, does it?
Just take a look at the chart of Nasdaq and see the short-term whacks that have occurred the last two times the DSI has gotten over 90. Chasing the upside didn't pay.
My thinking has been that after a few days of chop or pullback, the small caps would set up to rally again this week. The big caps need to hand the baton to the rest of the market because the divergences are piling up now. Let's see if they can do it.