The rally arrived. You know, the one I thought would show up on Monday, but decided to prove me wrong for 24 hours. Even if we go back down on Wednesday, I still think we'd rally again just due to the oversoldness.
But over the intermediate term, I believe the pattern is up, then back down. That's because the intermediate-term indicators need time to get back to oversold. The number of stocks making new lows needs to contract. Sentiment also tends to be skittish.
So let's move away from the oversoldness we've been discussing for the last few days, and talk about sentiment, specifically the Investors Intelligence bulls. Unlike the American Association of Individual Investors (AAII), the Investors Intelligence bulls do not tend to jump around like day traders, so it isn't often we see the week-over-week change in the bulls fall 9 points.
But that's exactly what happened this week as they fell from 57% to 48%. That's rare. As a matter of fact, it has only occurred seven other times since 2008.
It actually happened twice in 2008. The first time was in March, at what we refer to as the Bear Stearns low (blue arrow). Sure, that was a week before "the low," but we'd been sliding for two months at that point. That's quite different from now, when we are a week off the highs.
The green arrow shows us that it happened when we were about a week off the high, in late May. We bounced pathetically and then continued down for six or seven more weeks.
In 2010 we also had two occurrences. The blue arrow in late January came, when we were just shy of two weeks off the high and you can see, we rallied and came back down again (that W pattern I refer to often).
It also happened after the Flash Crash in May 2010 -- no surprise there. That green arrow shows that it occurred also about a week or so off the high. We bounced and came back down. Timing matters.
It took six more years before we saw it again. The blue arrow in February 2016 came at or near the low. But here again, look how long we'd been heading down for. We were not just off the highs.
Then we move to 2018. Remember that plunge off the high in late January 2018 (blue arrow)? We saw it there too. We had a crummy bounce and came down a week later and rallied for about a month. But the real retest was in early April, wasn't it?
It happened again off the December low this year. I should note that they do not publish the survey Christmas week so the reading arrived on January 2nd otherwise I believe it would have coordinated with the low. But that's not the point; the point is we'd been plunging for months already.
To me there is a difference when we see the bulls collapse like this when we are just a week or so off the highs vs. when we've been down for a while already. I would say in our current environment, we are just off the highs rather than having been down for weeks or months. So, this reinforces my view that the pattern should be up then back down.