I have been staring at the chart of the Sentiment Cycle for two weeks now, trying to figure out exactly where we are. We all know that sentiment is giddy, but Friday felt like we'd notched up even more. It was almost as if we need another leg higher than Enthusiasm that has morphed into "speculation."
I have no indicator or statistic that says we are in a speculative phase now. But when I see folks selling Home Depot (HD) , Apple (AAPL) , and Amazon (AMZN) and buying uranium stocks it feels speculative.
This is not to say breadth has soured. Heck no. Breadth on Friday, using the advance/decline line, was the best of the week. In fact, the readings were the best we've seen in more than three weeks. And for Nasdaq it was the best advance/decline line in four weeks. It's almost like a rush to "get me in." Yet, it wasn't the usual suspects that got bought.
When we do the same breadth exercise with volume, Friday wasn't as good for either exchange; in fact, it fell short for Nasdaq even vs. Wednesday and let me remind you Nasdaq was down on Wednesday. But let's stick with Nasdaq for this discussion.
TRIN is the Trading Index, or the Arms Index, named after the late great -- and former Real Money contributor, Dick Arms. It is a ratio based on the advance-decline line and up-down volume. The thinking is that a low TRIN says folks are feasting, perhaps too much, on stocks. A high TRIN means folks are selling, often indiscriminately.
I view a low TRIN as a very short-term overbought reading, but it is a high TRIN where I will, more often than not, cite it as a reason to be bullish for a trade. When folks sell indiscriminately or in panic, we tend to get a high TRIN, and a sign of panic is often a sign the selling is so fierce that we're seeing capitulation.
In the last month, Nasdaq has seen two very high TRIN readings and two very low readings, the type of readings we haven't seen in years. You can see the high reading in early November. That made a ton of sense.
You see that high reading came on the second day of selling in Nasdaq. On Nov. 9 Nasdaq lost 180 points. On Nov. 10 it lost 160 points. The panic selling on the second day makes sense, after all, it's not often Nasdaq sees back-to-back days like that. And as you can see that high TRIN reading was in fact a reason to buy Nasdaq.
Here's where it makes no sense. Friday's TRIN was actually a smidgen higher than Nov. 10's reading. And it's pretty obvious there was no panic selling on Friday. So, was there panic buying? Was there so much speculation outside of the big-cap tech names to cause such a high TRIN reading?
Again, I can't say with any statistics or indicators, but it felt more speculative or "get me in" capitulation than what we've seen in the last month.