Don't Get Comfortable. The Market Is Not a Sofa.
The big question is, if we rally, will it be one to buy or to sell?
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Let’s start today with a quick review of the market.
Most of February was a chop-fest. At least that’s what I looked for and what we got. Then, around mid-month, the McClellan Summation Index started to roll over, and I figured that meant a more rocky late February/early March. It was more rocky and much more relentless than I anticipated.
I had my eye on a number of charts including Microsoft, the SOX, and the Homies (ITB), because for almost all of February, they refused to break down. Eventually, in late February, they all broke those levels.
Microsoft broke but I would have thought the break would be more dramatic rather than the 5-6% decline we got. It has been a much slower, drippy sort of break. I mean, the stock was 390 in late February, and it is 388 now. Now, it leaves resistance at 405.
The SOX broke 4800 and it did have quite a spill thereafter, zipping right down to the prior support at 4300, a ten percent decline. Now resistance resides back at 4800-ish.
ITB is the most interesting chart of the three, though. It struggled to break 100, then it did so lethargically, held 97 (that prior low), and made a valiant attempt at a rally back over 100, only to give way well under 97. It’s hard to believe that after a 35% decline over four months this wasn’t more oversold, but apparently it wasn’t. I am watching to see if those other two charts have similar rallies and failures.
About ten days ago, I thought the market was short-term oversold enough to stage a rally. That turned out to be wrong. Each rally we got was exactly one day before we slid more. Yet, if we look back, March 4th (the day I thought we would be short-term oversold) turned out to be the day the majority of stocks made their lows. Take a look at the number of stocks making new lows on Nasdaq: that peak reading at 688 was on March 4th. Each push down has brought us fewer new lows. So, the majority of stocks did actually get oversold then.
Will Friday’s rally be more of the same one-day rallying? I don’t know, but the window is open for a few more days of rallying. The Overbought/Oversold Oscillator remains in oversold territory.
Sentiment turned quite bearish in the last week. I called last week a Realization Week, meaning it was the week folks realized why the market had been retreating. It was the week Wall Street firms cut their S&P targets, the week that they knocked down their GDP number, their earnings estimates, and recession odds began to rise.
We have seen the AAII bears hover near 60% for three straight weeks now. Long-time readers know that I am not a fan of this survey unless it is confirmed elsewhere. Last week, the Investors Intelligence survey confirmed it when we had more bears than bulls.
Other sentiment indicators did not confirm it. For example, the NAAIM folks refuse to take their exposure down. But the Consensus Inc. Bulls are now down to 49%, the lowest since the fall of 2023.
I am still in the short-term oversold rally camp, and as always, we must see what happens to sentiment on a rally. Do they fight it, or do they embrace it? The former is a plus, the latter, not so much.
As my former colleague, Jim Cramer, used to say, the market is not a sofa, it is not a place to get comfortable. I think this was most likely a trading low, not anything more.
