Everyone is so thrilled that the small caps finally broke out. And, yes, I know if I take the chart back more than a year, we'll see that old high looming, but for me, it is never about the index chart, but the underlying statistics. So let's look at the statistics.
The number of stocks making new lows continues to contract, a change that began last Thursday. As long as that happens, the 10-day moving average of this indicator is heading down and therefore is a positive.
The number of new highs, however, continues to disappoint. You can see the chart of the new highs on the New York Stock Exchange: There was an increase, but not proportionate with the new highs in the indexes. In fact, it didn't even come close. Nasdaq didn't come close, either, with fewer than 200 new highs vs. 248 a few weeks ago. But I am willing to give them a few more days to improve, because the market is not back to an overbought condition yet.
What we see is an indicator that had been trending down for weeks and on the big up day, the one that looked like a breakout, it flattened out. And that was it. So, you can see why I say I'm willing to give it a few more days to turn around and head upward, something it didn't do in April. In other words it needs follow through.
As for sentiment, just over a week ago when the Daily Sentiment Index (DSI) first tagged 90 for the S&P 500 and 91 for Nasdaq, I noted that they rarely moved up and over 90 without backing off and recording an additional reading -- or several additional readings -- over 90. Monday's DSI for the S&P is now at 82 and Nasdaq is at 85, so there is some room to move here. The Volatility Index, having gotten to single digits just before last week's pullback, is now back to 10.
It seems there is some room to follow through. But if we use the DSI, the runway isn't that long before we see these get back up over 90 or the VIX back under 10. This is the problem with not allowing proper pullbacks in the market. The next leg up gets overbought too quickly and sentiment turns bullish too quickly.
Finally I was asked to update my view on interest rates. When we last checked in I was of the mind that this 1.90% area was a lid for now and we have pulled back. It seems to me we are in the middle of the range right now as rates on the 10-year Treasury oscillate between 1.60% and 1.90%. No one seems to be leaning too hard one way or the other for the time being. If that changes I will write about it.