Back in mid-March, I showed this chart of the Sentiment Cycle and suggested the overall S&P 500 was 'just to the right' of 'Buy the Dip' where I have circled in red.
It was my view in the last 7-10 days we were set to get that second rally in that pattern in the red circle, setting us up for a move into Panic. Clearly, we didn't get that rally. It was also my view that if we broke it down by groups commodity stocks were heading toward enthusiasm and growth stocks were in the discouragement phase.
I don't think I would change very much in this view except to say it's possible I had gotten ahead of myself and we were really at Subtle warning on the overall S&P. And commodity stocks are now coming off of Enthusiasm rather than heading toward it.
The question that sits in front of us now is if we are heading into Panic. Will this week bring us Panic or are we still messing around in the red circle?
Sentiment-wise there are three surveys I track. The American Association of Individual Investors (AAII), which I have noted I only prefer when it is confirmed by other indicators, is currently showing bulls at 18%. The Investors Intelligence survey which is much more scientific than AAII shows 32% bulls and 33% bears. So there is some confirmation that folks are bearish.
The one survey that is not confirming is the National Association of Active Investment Managers (NAAIM) since they show their Exposure at 74 which is a far cry from the 30 they were at in early to mid March.
The Citi Panic Euphoria Model is nowhere near Panic, having just briefly kissed Euphoria two weeks ago.
The good news is the put/call ratio on Friday showed some fear for the first time. It chimed in at 1.3 which is the highest since March 2020. The 10-day moving average of this metric is at 1.0 which shows no extreme but is heading in that direction.
The equity only put/call ratio was also quite high on Friday at 0.87, also a reading last seen in March 2020. The 10-day moving average is at 0.58, which is quite a bit lower than the 0.65 reading we saw in late January. In other words, these two sentiment indicators have just started showing some fear.
Then there is the Daily Sentiment Indicator (DSI) which fell hard on Friday. Both Nasdaq and the S&P are now teenagers with Nasdaq at 13 and the S&P at 18. A few more down days would surely get these to an extreme single-digit reading.
But what about the Oscillator? We got oversold a week ago and have not been able to rally. A market that is oversold and can't rally is a weak one. The window is closing fast and that means that rallies probably don't last very long. Heck, there have only been three rally days in April since the fifth of the month.
I even did some what ifs on the Momentum Indicator for Nasdaq, walking it down 1,000 points over the next week to see if the Momentum Indicator goes up as price goes down (definition of oversold). Recall I did the same exercise a week ago and all we got was the red circle on the chart - chopping sideways. Now, when I do this exercise, the Momentum Indicator just goes down, indicating it's not setting up for the kind of oversold reading I prefer.
I think sentiment is short-term bearish enough that if we are down on Monday we could rally on Tuesday, but I'm just not sure we have enough momentum to do more than that.