I tend to avoid quoting seasonality factors in the market. It's not that I doubt that they work, but it always seems that when everyone is talking seasonality and how it works 95% of the time, I find that the market finds the 5% of the time it doesn't work.
I point this out, because I suppose in some fashion my comments earlier this week about the first or second day of the new month putting in a good showing for breadth in every month this year is a seasonality trade. I see it as a pattern that not many others have noticed. At least not yet.
But once again, for the year 2021, it happened. In nine of the months this year, breadth put in a good showing on the first day of the month and the other three times it was on the second day of the month. Thursday's breadth was the best showing since, well, Nov. 1.
My guess is that the market has in some way entered the new month with a short-term oversold condition, which has created this pattern. And we are still oversold. But for the first time this week, the Oscillators ticked up. You might need to squint to see it, but they did tick up.
They both remain in an oversold condition. The Nasdaq's Hi-Lo Indicator is now at 17%. Under 20% is oversold. The NYSE's is still not there yet. However for the last two trading days the NYSE has seen new lows contract.
But as I noted this week, the real shift was in sentiment. Wednesday was the day folks seemed to realize how bad things were in the market for the last month. We saw that reflected in the American Association of Individual Investors (AAII) weekly poll where the bulls are now 26.7% (down six) and the bears are at 42% (up six), which is even higher than they were in September. This is the sort of change we want to see.
The National Association of Active Investment Managers (NAAIM) even reduced their exposure. After five- straight weeks of readings over 100, they pulled in their horns and are now at 88. Let me note that these folks were at 55 in September (and 42 in May) but 88 is certainly a change of tone.
Yet the real shift was in the put/call ratio. The put/call ratio-keep in mind the market rallied on Thursday-was 1.09, which is the highest reading since October 2020. Yes, that long. On the eve of the election, you can understand folks buying a little insurance, but now? Maybe it's the employment report due out Friday morning? Whatever it is, that is a shift, and one that we should welcome.
The 10-day moving average of the put/call ratio is now .88 (it was .98 in September), but look at it this way: Folks weren't buying calls on the first up day.