Let me start by noting that, despite the late-day selloff on both Thursday and Friday, I have not changed my view. I think that type of action is what we tend to get when the market is short-term overbought, as it was in the latter part of last week.
My view has been that we should reach a short-term overbought reading, back off or chop, and rally again. It is that subsequent rally that tells us a lot about the health of the market.
For example, will breadth, which has been good these past two weeks, stay healthy or will it tail off? If breadth tails off, it is bearish. Will the number of stocks making new highs increase? For now all they have done is lift a bit, but they are far off the peak reading. I can live with fewer than that peak of 700-plus new highs, but just look at March and April and you can see 300-400 was quite common for new highs; now we haven't been able to get over 250 on the New York Stock Exchange.
Nasdaq's new highs are still sitting under 200 and while the number of new highs peaked for Nasdaq at 700-plus back in February readings under 200 are lacking. So that's the test this coming week for these breadth measures.
We'll all see what happens to sentiment. Two weeks ago, I thought sentiment was too bearish, with the National Association of Active Investment Management (NAAIM) showing their exposure down at 44. Last week, it moved up to 68. We'll see what this week brings but a move into that 90 area would be a sure sign folks are 'all in' again. Over 100 and we're back to an extreme.
The Investors Intelligence bulls came down to 51.5% last week, which was the lowest in months. I expect to see that lift this week, but here, too, we will have to see how much it lifts. A reading over 55% and it's a shift; back over 60% and it's extreme.
We can already see the shift in the 10-day moving average of the put/call ratio. Last week saw exactly one reading out of the five days that was over .80. That a far cry from two weeks ago when we couldn't get a reading under .90. In fact those readings under .80 were the lowest readings since May 3, and therefore were the only such readings in the month of May that were under .80. So the shift is on when it comes to options.
I expect to see the ten day moving average fall in the days ahead.
One of the biggest negatives out there is all the speculative stocks on the move again. While I don't think we have the same frenzy we had back in late January, I do think that when those stocks are what's moving in the market it is unsustainable.
Overall, I still believe the market is in a big giant sideways.