So far getting short-term overbought hasn't mattered to the market. Neither has the first level of resistance. But what I find most fascinating is sentiment.
First let me explain one reason that I believe retests from severe lows tend to take place weeks or more likely months later. Yes it has to do with the indicators but it also has to do with sentiment. It's rare for folks to turn from bull to bear and back to bull so quickly. It's a conversion that takes time.
Consider how long it took for the Investors Intelligence Bulls to go from 60% (late September/early October) to 30%. They did not fall to 30% until the first week of January. That's three months, which I think is a long time.
Now those bulls are back at 42% so consider what it will take to get everyone back in the pool, meaning what will it take to get the Investors Intelligence bulls back to at least the mid-50s? I suspect next week we'll see them climb but it's hard for me to believe they will be back to the mid-50s in another week. More likely it would take a few more weeks at least. That's one way we'll know sentiment has gone full circle.
Another way is the put/call ratio. You have seen me note here on these pages that the put/call ratio has remained relatively high since the low. That changed on Thursday. We have not seen a put/call ratio (total) under 100% since January 9 and even at that we have only seen this metric fall under 90% once since the calendar turned to 2019. Thursday saw it fall to 80%. That's a far cry from all those readings over 100%, it was if they didn't even fence sit for a minute.
The equity put/call ratio fell too, to 52%. Recall two days ago it was 70%. That's quite a turnaround in just two days, isn't it? Either way, since the Christmas low this indicator has been under 60% exactly three times. On December 28 it was 44%. Three trading days later we saw the S&P fall 60 points in one session. The other two times the sub 60% readings were 59% which isn't very much.
I have always been a believer that readings under 50% are yellow flags (see above, the move within days). The 10-day moving average of the equity put/call ratio stands at 64%. Readings under 60% for the moving average tend to be problematic for stocks. But the math says it takes more than one day of low readings to get the moving average there. But for the first time since the rally began, we're seeing real acceptance. We'll see if it continues enough to pull down the moving average.
Short term I still think we should pull back but the market doesn't care what I think. On an intermediate-term basis we're not yet overbought (that arrives in a few weeks). If the sentiment shift continues as we head to an intermediate term overbought condition then we may finally see everyone back in the pool just around the time we get to an intermediate term overbought reading.