Anecdotally, it feels like folks were much more encouraged -- more bullish -- after Wednesday's rally than Monday's. Perhaps that's because they are now back in the stimulus camp, or at least for Wednesday they were. Do you realize that for the last five trading days, the S&P has not had two consecutive up or down days? I'd call it chop -- but the moves have been 1%-2%, which feels like more than chop.
Overall, though, the breadth has been better. A week ago, we had the McClellan Summation Indexes turned up for the first time in more than two months. The Cumulative advance/decline line (breadth) is back near the highs, even though the S&P is not. Notice there was a negative divergence at the early September high (red line). So this is a change.
But let's talk about sentiment, because the Investors Intelligence bulls didn't move much, but we picked up more bears. The bears are now at 23.2%, which is the highest since early June, when they were still falling from the big peak. This surprised me, and I consider it a positive. If the bears fall back under 20%, I would no longer consider it a positive.
Now in the short term, we have an upcoming overbought condition. The Overbought/Oversold Oscillator has finally moved. It will be overbought by Friday of this week.
When we look at the Nasdaq Momentum Indicator, we see a similar story. When I plug in higher closes for the next week for Nasdaq (+400 points), you can see it doesn't matter, the Momentum Indicator goes down anyway. That's the definition of overbought.
You can see that prior peaks in the indicator resulted in pullbacks for Nasdaq; not all of them were like September, many were just a few days or a week.
Is the indicator perfect? No way. In mid-September, I performed the same exercise for this, but plugging in lower closes for Nasdaq and we found the indicator went up anyway, making it oversold. Nasdaq rallied for two days before coming down again and getting oversold again. Call it a general time frame, but it seems to me by next week we'll be overbought on a short-term basis.
Next week kicks off earnings season. Often, we find that if the first week of earnings season sees the market pull back, it tends to lower expectations for the rest of earnings season. This then allows for earnings disappointments to be priced in and so we tend to rally the following week. In other words, unless we are in a full-blow decline, it is unusual for the market to be down the first and second week of earnings.
I will continue to monitor sentiment. I noted Wednesday that if we pull back, I would expect folks to go into panic mode in a hurry. I still think that is the case.