Thursday was somewhat of a Realization Day.
I believe it was the day folks realized that bonds matter. It was also the first time all week that the newly favored groups like banks and energy could not withstand the pull on the downside. That likely helped contribute to the realization.
So, let's begin with the bonds.
The Daily Sentiment Index (DSI) finally reached a single-digit reading for bonds. Let's look at the last time we saw this. It was February 2018. Let's go to the chart of the Yield on the 10-year note. You can see the red arrow on the chart. Bonds rallied (yields fall when bond prices rally) and yields fell a bit and yields went up one more time. But step back and you can see this was the area that they had basically had enough.
Back in December 2016 the DSI for the 10-year note reached single digits. Here we see an immediate decline in rates.
Then there is iShares 20 Plus Year Treasury Bond fund (TLT) . Look at the volume from Thursday; it rivals the volume we saw back in March 2020. So we know this is a sign of capitulation in progress.
Now let's talk about Nasdaq. That is where so much of the selling has taken place. The number of stocks making new lows is still very high. The Hi-Lo Indicator is also still very high (around 95%; it gets oversold under 20%). But there is the Nasdaq Momentum Indicator, which I calculate myself.
What I do here is plug in lower closes for Nasdaq to see what point the Momentum Indicator stops going down and heads up. That is the definition of oversold. Since three of the four trading days, this week had triple-digit moves for Nasdaq I plugged in down one hundred points every day for the next week or so. On Thursday March 4, the indicator turns up sharply.
I even tried it with a 50 point move down each day and with that it stops going down on Friday or Monday, but does not turn up until Tuesday or Wednesday.
This is not meant to pick the exact day, although it is nice when it happens that way. What it is showing us is that with the bond DSI where it is, and Nasdaq heading back to an oversold condition, it will be time to start looking for another oversold rally in the coming days.
Let me finish by noting the intermediate-term indicators are not oversold, so I would expect this volatility to continue.