To me Tuesday's market action was the perfect example of how to use the Daily Sentiment Index as an indicator. As noted here yesterday, it tagged 90 for both Nasdaq and the S&P after Monday's close. Readings 90 or above to me are red flags; they mean it is not a good time to buy.
Notice I did not say it is a good time to go short. To go short you probably need several other indicators to confirm but at the very least, when sentiment gets that giddy using this particular indicator, it is best not to put new money to work. And it will surprise no one that this indicator backed off on Tuesday. Nasdaq is down to 85 while the S&P is now back to 83.
Sticking with sentiment, the Investors Intelligence Bulls are at 54%, which is a minor notch up. I admit I am surprised this survey does not show bulls over 55% yet but it obviously does not care what I think. It shows elevated bullishness but nothing extreme or giddy. Over 60% is giddy.
Finally, it should also come as no surprise that the put/call ratio rose on Tuesday. The total ratio is 96% which is the highest in a week. My takeaway is that the action on Tuesday took some of the complacency out of the market.
While we're on the subject of sentiment, there was a survey released on Tuesday by Bank of America/Merrill Lynch BAC or BAML as folks call it (I thought they had dropped the ML part, but perhaps old habits die hard!). It is a fund manager survey and the two big talking points, as best I could tell, were that managers had their lowest exposure to stocks since September 2016. I realize that might seem terrifically bullish from a contrarian standpoint but the S&P fell 5% from early September 2016 to November. So perhaps these folks were right to have low exposure leading into the election? I would find it more bullish if their exposure was so low in November 2016, but not September.
The other takeaway is that there is an awful lot of short exposure in European equities. Just over a month ago, I highlighted European stocks here. VGK is an ETF to be long European stocks and I showed a chart of it vs. Emerging Markets (EEM) because there had been so much love for EEM but none for Europe, yet the ratio had bottomed in late January. Since then VGK has had a nice run (about 7%).
I would not buy it here. In fact I think it is more apt to correct back to $53-$54 than anything else. Isn't it possible this last push up from the blue line was those BAML survey folks short covering? Regardless, there is a lot of resistance up here and I think it is unlikely to eat through that without doing some work.
I suppose I should finish off with a word on the Transports which I have been harping on lately. That 10,000 level is now very obvious support. A break of that would be bearish.
I know Nasdaq and the FANG stocks in particular have been terrific lately but I thought I would show you the chart of the 10-day moving average of Nasdaq's TRIN (blue line) with Nasdaq. I don't use this indicator very often but when I saw Nasdaq's TRIN at 0.49 after Tuesday's close which is quite low I thought it was worth exploring. In the last year when it has gotten this low Nasdaq has begun to top out and head into a pullback. It hasn't turned back up yet.
Will You Have Enough Money to Retire?
Want to learn about retirement planning from some of the nation's top experts? Join TheStreet's Robert "Mr. Retirement" Powell live in New York on April 6 for our Retirement Strategies Symposium. For a limited time, tickets are available for $99 for this full-day event. Check out the agenda, learn about the speakers and sign up here.
