Happy New Year!
Let's begin 2019 with a short follow up to my Dec. 31 column regarding a retest. since the question that consistently showed up in my inbox was, "when will we get the retest?"
I am not a fan of looking for retests shortly after a low. The main reason is the indicators. It takes time for them to cycle through, but more so, sentiment has much to do with it.
Just think about how long it took for sentiment to get truly bearish from the time the market started going down in October. Just look at the Market Vane Bulls, which are now at an extremely low reading of 42%, the lowest since 2011.
In October when we neared the highs in the market this surveyed group was still at 64% bulls. The low in late October saw bullishness come off but at 55% it was not even close to extreme.
It took that final few days of selling in late December to see this group crack the 2016 low readings. That's nearly three months to get extreme.
While I believe sentiment can turn bullish faster than it turns bearish, rallies at this point are unlikely to get folks terribly complacent in a week or two. More typical is that it takes several weeks or months.
The examples from the Dec. 31 column discussed 2002-2003. From the first extreme in July 2002 until the next retest in October was nearly three months. Then it was an additional five months before the next (and final) retest. In 2008-2009 the time frame was shorter but still the extreme came in early October with the next one in late November and the final one in March.
Real retests -- that are successful tests - -tend to come months after the initial extreme reading.
As for the current market situation, we are not yet overbought. My expectation is that it will take about another week for my own Oscillator to reach an overbought reading since it was so extreme on the oversold side of the ledger.
The McClellan Summation Index actually turned upward on Monday. It took a week to do so, which means there's good news and bad news in this.
The good news is that it turned up, which tells us the majority of stocks have stopped going down and have joined the rally. The bad news is that typically when it takes more than two-to three days for this indicator to turn up off a low in the market, there will be a retest (there's that retest talk again).
The real issue for the market right now is all that resistance overhead. It is everywhere. It is also very obvious. Who doesn't see 2600-2620 on the S&P 500 as resistance?
I don't want to pre-judge how the market will handle the resistance, if and when it gets there, so I will pay attention to the indicators. For example, if the market gets to resistance and it is overbought when we get there, then I think resistance will matter a lot. But if we get there and we're not overbought, then I think it is going to be a more minor issue.
As long as the window is open (meaning until the market gets overbought) the market gets the benefit of the doubt to complete the oversold rally. And we'll monitor how fast complacency comes back.