Usually by this point in a rally -- one where the S&P is up nearly 5% in a week -- we hear calls for a melt-up and all sorts of higher targets start flying. This is in opposition to all those lower targets we heard just a week ago. But that doesn't seem to be the case.
Can it be because there was plenty not to like about last week's rally? Like the way breadth lagged every day except for Wednesday? Or the way the banks and semis underperformed after having been outperforming for weeks? Or the way the small caps were left in the dust?
Oh, this is not to say folks are bearish. Heck, the put/call ratio was 76% on Friday which is the lowest reading since August 27. In fact the last three times the put/call ratio was in the mid 70s we did have a short term peak in the market as you can see on the chart of the S&P below.
But as I explained on Friday, the moving average lines of these put/call ratios are still heading down. In fact, the put/call ratios for ETFs were once again under 100% Friday, the last time we saw strings of such low readings like this was the same time of the year last year. I can easily see short-term action like this below. This is not to say I expect a ramp like we saw in January again, but as you can see on both the above and below charts of the S&P, we had pullbacks but they were short-term in nature.
We will be maximum overbought later this week, both using the Nasdaq Momentum Indicator and my own Oscillator. Nasdaq's Momentum Indicator reaches its peak sometime between Dec. 4 (Tuesday) and Dec. 7 (Friday). This means that even when I crank Nasdaq higher by nearly 200 points the Momentum Indicator still goes down after that. That's the definition of overbought.
However the 30-day moving average of the advance/decline line is not yet overbought. It will reach a moderate overbought reading mid-month but at this point it appears it will reach its maximum overbought reading in January. That's why I think whatever pullback we get would lead to another rally.
The Hi-Lo Indicator is still under 15%. That means it is still oversold. Despite the poor breadth the McClellan Summation Index is still rising. And sentiment, despite those low put/call readings we saw on Friday, is still not even complacent. The Investors Intelligence bulls are still sub 40%, although I do expect they will rise with this week's survey. The Market Vane bulls are still at 52% and even the Citibank Panic/Euphoria Model, which did such a good job in late August and September when it tagged Euphoria is hovering near Panic; it hasn't budged upward.
I think we're due for a short-term pullback later this week but then I'd expect another rally attempt.