Software Stock Investors Are Discouraged

Trader Bear Market NYSE

As long-time readers know, I love to monitor the sentiment of the market. So I must share with you that, anecdotally, there was absolute panic in the software stocks on Friday.

The volume was off the charts, and when I posted the chart of IGV on Twitter on the weekend, the comments leaned almost 9 to 1 bearish, with many telling me that technical analysis did not work any longer, etc. Friday afternoon, the folks on television were a bit hysterical as well.

You might recall that on Thursday evening, I posted the chart of IGV along with the chart of the Sentiment Cycle, noting that I thought a lower low would take us into Discouragement. Apparently, it did.

But here’s the best part. By Monday afternoon, when software stocks had turned upward and were the market leaders, the question of the day was: has software bottomed??? I am not sure if we have seen an about-face in sentiment quite that fast before. It’s possible, but I don’t recall.

I would also note that the rally in software seemed to me to be short covering. I don’t much care how a rally starts, because most begin with shorts rushing to cover, but that might be another example of those hedges coming off.

Speaking of hedging, we saw a big change in the ISEE call/put ratio for equities on Monday. We have not seen a reading over 2.0 since March 9^th. You might recall I kept harping away about it. Nasdaq has rallied nine straight days, and still, this indicator could not lift itself up over 2.0. Well, on Monday it jumped to 2.78, which is the highest reading since mid-January. Now that is the first hard data change we’ve seen in sentiment since the rally started two weeks ago.

The moving average lines are all still extreme (still supportive of the market), but along with software no longer on the ‘bearish’ list, now we see calls are back in style.

Nasdaq is in fact up nine straight days, something that has not occurred since we lifted off the lows in the fall of 2023. The longer we go without a down day, I always think it is bearish because it becomes too much too fast, which makes the market quite vulnerable.

I have been pointing to early this week as the timeframe when the market will be back to an overbought condition (short term), and by the end of trading on Tuesday, we’ll be there. You can see it clearly on the chart of the Nasdaq Overbought/Oversold Oscillator.

Last week, I showed you the Nasdaq Momentum Indicator and how it would get overbought midweek this week. Now here is the Russell 2000 Momentum Indicator, where I plug in higher prices, and the indicator peaks midweek.

Two things to remember: the exact day is not important, but the general timeframe is (this week). And note that the peak back in November saw a gradual drift/correction before resuming the upside. I would not be surprised by that type of action because I think it takes a while to truly convert sentiment.