In the week I have been gone, I have seen some anecdotal shifts in market sentiment. Of course I have -- the market has rallied!
But have we seen such shifts in the indicators? Not much.
And that to me means we are still in a situation where now that we've had the short-term oversold rally (and are leaning toward short-term overbought) any pullbacks/declines we see in the next week or two would only serve to get these sentiment indicators more bearish, not less. Any pullback/decline would also serve to get the intermediate-term, non-sentiment indicators more oversold, not less.
The sentiment indicator that changed the most was the National Association of Active Investment Managers (NAAIM). You might recall just before I departed on vacation their exposure had plummeted to 30 (from 102 in late July/early August). It has since rebounded to 60, which is more neutral. But consider if the market pulls back in the first half of September, where is this more likely to go? I say it is more likely to get back down to 40-ish than it is to rise to 80. And back to 40-ish would show too much bearishness, wouldn't it?
The Investors Intelligence bulls actually dipped a bit more to 43.1% (from 44%) so I suspect this coming week will show a rise but that doesn't change the premise that should the market pull back in the first half of September this is more likely to fall to the low 40s than it is to rise to the 50s.
The American Association of Individual Investors (AAII) had very little change with 33.1% bulls and 34.5% bears, which means it still has (marginally) more bears than bulls. Again, if the market pulls back in the first half of September I would think this is more likely to see even more bears than bulls.
Then there are the put/call ratios. The 10-day moving average of the equity and the total put/call ratios rolled over, as expected. But they have not plunged yet. And if the market pulls back they are unlikely to plunge and more likely to rise or mill around.
However, it is the 30-day moving average of the equity put/call ratio I want to look at today. We looked at this chart a month ago when it got down near 0.55. This decade-plus chart shows that with the exception of that period from 2020-2022 and December 2022 it has typically stayed in this range. We are now approaching the top of the range. So once again, should the market pull back in the first half of September, isn't it more likely that this indicator will make it to the top of the range (the top of the range is where we tend to see "too much bearishness") than back to the bottom (the bottom of the range is "too much bullishness")?
The McClellan Summation Index did turn up but not as much as you might think it did. But here too, if we pull back, this is more likely to be a shallow dip than a plunge, in my estimation.
Finally, let's check in on the Volume Indicator which bounced off the oversold level of 45%. It now stands at 48%. A pullback in the market would just take it right back to an oversold condition.
We are short-term overbought and so some chop or a pullback makes some sense in the first half of September but that won't change the intermediate-term indicators.
