How Much of a Game Changer Was Monday's Rally?
The tariff talks gave investors reason to cheer. But what has really changed?
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I was of the mind that the market would chop some more this week and then have another rally next week into the intermediate-term overbought condition. But you know what they say about the best laid plans….
Did Monday’s rally change anything? Not statistically. Although, I do think after that kind of rally, we are more apt to give some back and chop around than we are to keep surging. Even so, I still think we would rally again next week as we head into the intermediate term overbought condition.
The number of stocks making new highs increased modestly, but the Nasdaq Hi-Lo Indicator ticked up ever so slightly. I think it will tick up some more over the next week. The key is if it ticks up over last week’s high. That remains to be seen.
On the sentiment front, I did hear the phrase, ‘game changer’ several times on Monday, so what I already expected in terms of a change in sentiment was only solidified by the rally.
We already know that the ten-day moving average of the put/call ratio fell under 0.85. I expect to see that indicator bottom and start heading up over the next week or so. It just rarely gets that low and stays there for extended periods of time. But will the other sentiment indicators catch up to it?
NAAIM clocked in last week at 81 on their exposure, so I expect this week they ought to be over 90. Perhaps by next week, they will be on margin (over 90), but that remains to be seen. I have noted that I expect the Investors Intelligence bulls might nudge up to be more than the bears since they were close last week. AAII is probably too far away to get a major shift.
But, when it comes to the Daily Sentiment Index (DSI), there is something to pay attention to as we head into the intermediate-term overbought condition. The DSI for the S&P is at 75, and Nasdaq is at 76. I consider those neutral. But if we get another rally into that overbought condition, it is possible these will be over 85 by then.
And then there is the VIX. The DSI for the VIX is now a teenager at 19. As a reminder, under 15 (or over 85) and it’s a yellow flag, and single digits (or over 90) it’s a red flag. If the VIX falls much more in the next week or so (heading into that overbought condition) and the DSI on the VIX is under 15, then we’ll know sentiment has changed enough that we should expect volatility to come back in June.
So while not much changed statistically during Monday’s rally, there is still much to watch as we head into the overbought condition late next week.
Speaking of low readings on the DSI, after having gotten a reading of 10 two weeks ago and a 13 last week at the low, we have had quite a bounce. Resistance is pretty heavy at 65. I would be shocked if we can get over that easily.
