In the last few weeks, we have seen the market reach an intermediate-term oversold condition that is now neutral. We saw improvement in breadth, something we hadn't seen in months. We saw improvement in the number of stocks making new highs and a contraction in new lows. All of these are considered positives.
Here's what else we have seen. A change in Nasdaq. For months on end, mega-cap tech stocks were the only place money seemed to flow to. Between late February and mid-August, Nasdaq did not encounter more than two consecutive red days. In early August it went to three. Within a few weeks, it had seen three consecutive red days twice. That was a change.
Another change was that the Invesco QQQ fund (QQQ) finally broke down from the channel that had been in place since April. Then in mid-September, Nasdaq went four red in a row. Last week, it went four consecutive red again. That makes it twice in a month. That shows a change in the pattern that we saw from earlier this year through August. It's subtle but it's a change.
If I had a gun to my head, I would say it means we are slowly seeing a move away from a market that rewards mega-cap tech only. That doesn't mean they have to be tossed away, but I think it means it's no longer the only game in town.
Now, along with the theme of improvement in the indicators, we did get short-term overbought a week ago and the result was a market that chopped all week last week. Sentiment remains a problem for me, though.
The Investors Intelligence bulls, which did an admirable job of coming down to 61% to 52% in September, are back at 56%. When they were at 52%, it was easy to think there were no worries, because if the market pulls back anymore this will fall into the 40s and make the indicator bullish. Now it is back in the yellow zone (over 55%).
The National Association of Active Investment Managers (NAAIM) saw its exposure go from 102 in late August to just under 60 a few weeks ago. Here, too, I said if the market pulls back, this will fall under 50 in a hurry, which would make it bullish. But it didn't do that. Instead it surged to 103 this past week.
Even the American Association of Individual Investors (AAII) got the most bullish and least bearish they have been since pre-pandemic. I mean, what is going on?
Now we have the International Securities Exchange Call/Put Ratio, which has been over 100 for all but six days in the last month, and one of those days it was 99. That means the 21-day moving average has been over 100 since July. It rarely spends so much time in this lofty zone. The last time it did so was summer and fall of 2018 (orange box).
Then there is the Volatility Index put/call ratio. We looked at its 21-day moving average last week and noted that with the exception of late April 2010 -- just before the Flash Crash in May of that year -- it had been bullish when it was this high. All those bullish times had come with the market at lows, not near the highs as it is now.
Friday's put/call ratio for the VIX was 3.48 which is incredibly high. I had to go all the way back to 2008-09 to find other readings this high. Yes I know there was one very large transaction but I do not like to rationalize an indicator. I would also point out that this indicator has been regularly over 1.0 for a month which is why the 21 day moving average is at the highest reading ever.
In any event I went back to look at the four very high readings from that 2008-09 period and was surprised by some things I saw. Points C and D came after the big March low so it makes sense that folks were betting so heavily on a lower VIX, and that they were correct.
Point A was the biggest surprise to me. Was the VIX really ticking just under 20 in August of 2008? As Lehman was teetering the VIX was so low? Wow. You can see that the bet on a lower VIX was incorrect as the VIX went from 20 to 90 by October.
In February 2009, about a month before the low, the VIX went from 40 to 53 on that last 10% move down in the S&P to the March bottom. It's hard to see on the chart, because when you have a move from 20 to 90 everything else looks puny. But once again the VIX put buyers were wrong.
I know this can be dismissed as election positioning, but at the same time such extreme positioning usually gets unwound at some point. And it's not like the other sentiment indicators are screaming "folks are too bearish."
The most bullish sentiment indicator I have is my unscientific Saturday Twitter poll. Recall last week we saw the most votes for "up" in the five months I have been doing these polls.
Saturday Poll
— Helene Meisler (@hmeisler) October 17, 2020
The next 100 points for the S&P?
So of course we got a choppy to down week. This week the 'ups' are at 48% and the 'downs' at 52%. There really is nothing like price to change sentiment.
