Day 7 of the Market Run: Here’s Why a Pullback Looks Likely (and Why It May Not Last)
Short-term overbought signals are lining up for early next week, even as breadth and key cumulative indicators keep improving. The setup argues for a pause—but also hints that dips could be buyable while sentiment remains cautious.
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Should we start with software? I mean, for another up day in the market, it seems it was all anyone could fuss over. They have yet to fuss over the Transports. Although they do love the semis.
Why should I chime in on software? Well, because just prior to the start of the rally, I had noted that I thought IGV, the software ETF, was heading toward discouragement on the Sentiment Cycle chart. I still believe that to be the case.
Many of the individual stocks had high volume (more on that below), but let’s start with IGV, which traded the most volume it has traded since the late February low. That’s a lot of selling for a market that has been up for seven straight days.
Since the software top broke down, I have been using the Sentiment Cycle chart as a general guide for the group. I do think, especially if IGV breaks to a lower low in the next day or two, we are getting to Discouragement, but I want to reiterate how long it takes them to base after they get there.
Not only that, but they should also begin to differentiate themselves. There will be those that never come back and those that eventually come back. But right now, we simply do not know.
As for the volume, almost all of the names I looked at had high volume. That is probably one reason we saw upside volume at a mere 50% on Thursday. And energy was down as well. I am not rationalizing the lack of upside volume because I do not like to do that, but I am capable of understanding why the volume was lacking.
Away from that, we are now at Day Seven for the rally, which is quite an extended run. My own Overbought/Oversold Oscillator gets overbought early next week. The Nasdaq Momentum Indicator gets overbought early next week as well.
Yet the McClellan Summation Index continues to rise. So does the Volume Indicator. And breadth is much better than the volume is.
Then there is sentiment. The AAII folks are warming up to the market again, to no one’s surprise. The bulls inched up to 36.3%, and the bears fell seven to 43%. So we still have more bears than bulls, but I suspect by next week that may no longer be the case.
The Investors’ Intelligence bulls are at 33.3%, and the bears are at 27.8%, so they too are still cautious.
The put/call ratio remains elevated, and the ISEE call/put ratio’s 21-day moving average is now at 112, the lowest in more than two years. I expect this indicator to make a low in the next few days.
We’re heading toward a short-term overbought condition, so we ought to pull back. However, from what I can tell, sentiment has not fully embraced the rally yet. Thus, I still think pullbacks will lead to another rally.
