Is a Flight to Quality Bullish or Bearish?
Investors are flocking to safe harbor stocks. Let's take a look at the charts to get an idea of what comes next.
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You know what changed this week? No, it’s not the wholesale selling in software or even the selling in the semis. It’s that when it comes to the small caps folks started favoring profitable companies over unprofitable ones.
For the longest time, I kept showing you the ratio of the SML (S&P small cap 600) to IWM (the Russell 2000), with the former being profitable companies and the latter being unprofitable ones. Take a look at how that relationship changed about a week ago. It has zoomed in favor of profitable vs unprofitable.
The other thing that changed this week is that the S&P started out performing Nasdaq by a wide margin and the ratio broke out to a higher high. Typically, when this happens, it is not bullish for stocks overall. What it tells us is that folks are opting for the more staid stocks of the S&P over the high beta of Nasdaq.
And we have certainly seen it. When was the last time the Transports surged eight percent in three days without oil collapsing?
Or the staples surging to new highs?
Even my old friend XLB, the materials sector, is cruising along.
If I had to guess, this is partially the result of money coming out of some of those mega-cap stocks. It has to go somewhere, and there aren’t enough mega-cap stocks that are non-tech for the money to go into, so it goes into a whole host of stocks. And it bullies them, creating these violent moves. It’s the 493 vs Mag 7.
But now for some more news that is not terribly bullish for stocks. The Investors’ Intelligence Bulls jumped up to 62.3%. That’s pretty high. The last few readings in this neighborhood were 62.9% in December 2024, when the majority of stocks peaked; they were at 63.6% in July 2024, right before we saw a ten percent decline in the market over the ensuing few months, and 62.5% in April of 2024, which was when Silicon Valley Bank collapsed.
Of course, the bulls moving up like this and the bears staying the same at 15.1% give us a bull/bear ratio of 4.1. That means the ratio has pushed over the critical 4.0 level, also not a great time to be plowing money into stocks.
I have noted the last few days that I expect Nasdaq to get to an oversold reading later this week, using my own Overbought/Oversold Oscillator. If I use the Nasdaq Momentum Indicator (not shown), it tells me early next week Nasdaq will be short-term oversold. So, I do expect, within a few days, we will see an oversold rally in tech-land. Another down day in software and/or semis, and the bottom fishers will surely quiet down. I didn’t hear one person quoting the RSI on Wednesday!
At this point, unless sentiment changes drastically (like a very high put/call ratio, a jumpy VIX, a massive change in the surveys) I expect the rally to be short-term.
