There is no magic bullet when it comes to markets. There is no one indicator that screams "buy" or "sell." But there is a point when we know the runway is short unless we get a pullback. I think that time is now.
One reason is the Daily Sentiment Index (DSI), which has been showing a reading of 93 for three straight days for Nasdaq and now the S&P has joined it with a reading of 91. Also, notice that Nasdaq has had no problem rallying 400 more points since the first such reading, emphasizing there is no magic bullet.
Again, as we saw with Nasdaq, it can rally some more, but in my view we got a decent rally off that "too bearish" sentiment a week ago and that has changed the sentiment back to the point where folks think the market can't go down.
One thing I would point out is that even the television folks noticed that the small caps and value haven't participated in the rally. I mean how can you miss that they have underperformed so starkly? How can you miss that the banks can't even lift their heads up off the mat? You can't.
In any event, breadth was good, but not great. But there was a change. The McClellan Summation Index finally stopped going down. It took five straight days of positive breadth readings and now it needs one more positive day to actually get it to turn up. That's a lot of work just to stop going down.
Nasdaq's McClellan Summation Index, where I use volume instead of the advance/decline line, started down almost two weeks ago and this torrid rally over the last week has not turned it back up. It still needs a net differential of positive 500 million shares (up minus down volume) to stop going down. Notice that it has not turned down once since the lows until recently, despite Nasdaq having a few minor corrections. To me this shows the concentration of the Nasdaq rally in the last week.
But let's get back to sentiment. The Index put/call ratio's 21-day moving average just pushed to a higher high. It is now the highest since October 2011. This is in stark contrast to all the other put/call ratios that are so low. What to make of it?
Typically, as in October 2011, such a high reading is bullish for stocks, but it is typically accompanied by high readings for equities and exchange-traded funds, which is not the case now. My take is that folks like their stocks but don't like the market, or they want to be hedged.
I can find one other time that the Index ratio's moving average was so high and the equity ratio was so low and that is April 2010. It took a few more weeks after that to have the Flash Crash just to put that in perspective. No, I am not looking for a crash, just pointing it out.
There was another point on the chart I found interesting. It was quite high heading into January 2016 and the market had a decent plunge over the ensuing weeks, making a very good low later that month. I suppose our takeaway from this is the high index put/call ratio tends to be accompanied by higher levels of volatility. Speaking of which, the VIX was green on Monday.