Whenever we have one of these types of markets, where we get so oversold and sentiment gets so bearish and then we rally, the first thing I mark down in my notes is one question: How soon will everyone embrace the rally?
That to me is almost always key, because if folks turn bullish too quickly, it is not a good thing. If, rather, they are cautious or are at least not fully embracing of the rally, then we can climb a wall of worry for a short period of time. But if bullishness returns in a heartbeat, I would tell you it's a bad omen.
At least for the day on Monday, the put/call ratio remained quite elevated at 1.2 for the day, so on that score we can say the turnaround wasn't embraced too quickly. If we manage to rally into the end of the week and folks have moved to embracing the rally, then that is problematic.
I have seen so many statistics cited about prior times that we have seen this index or that one down this or that percentage and it turned around, similar to what we saw on Monday. As someone who tends to be a bit of a slave to the indicators and statistics, you can imagine I also recognize dates and times in the market. I recognize almost every one of those dates cited as periods in bear markets.
But doesn't that make sense? We don't see volatility, such as we've seen in bull moves do we? We don't see the Volatility Index spike when markets are calm and quiet. We surely don't see the market get as oversold as this one got when things are humming along, do we?
And for sure, sentiment doesn't get as bearish as we've seen when things are going swimmingly. I would note that the Daily Sentiment Index moved up to 20, so unless the market collapses in the next few days (not my assumption) we are unlikely to get to single digits for this leg down.
We did see the number of stocks making new lows explode as Nasdaq clocked in at 1750 and the New York Stock Exchange at nearly 800. Most of those turned out to be spike lows and spike lows tend to hold for a time. I would note that the Hi-Lo Indicator for Nasdaq is now at .08. the NYSE is at .21. I expect no matter what the markets do in the next few days, these readings will be lower than they are now. That's the math.
The Invesco QQQ (QQQ) saw volume explode, as well. My view has been that high volume in the QQQs is often capitulatory in that we tend to rally from there. For now, I will consider the nearly 200 million shares traded as such.
I do not expect the volatility we've seen to go away. I will reiterate that I think 2022 will be about trading and not falling in love with your stocks. Just as we get comfortable is when the market will come back to bite us. So don't get comfortable.