The Amazing Kreskin Says the Market Will...
Well, even The Amazing Kreskin doesn't know. Let's look at the indicators instead.
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Can we even call the market a rotation into the 493 on Tuesday? It felt more like a rotation into the Dow 30 as that ancient index saw so many stocks rally, and rally hard.
Many of you noticed that after Monday’s one-hundred-point rally, you could not even see it on the chart of the Overbought/Oversold Oscillator. That’s because the Oscillator is based on breadth, and as we said, breadth was not great on Monday.
It is also because the Oscillator didn’t really get oversold until Tuesday. Now you can look at the chart and see it has lifted. I do sometimes (well, more than sometimes) wish I were the Amazing Kreskin, and could hold the envelope up to my forehead and tell you what the market will do tomorrow, but I can’t. What I can tell you is that we are still oversold, so even if the market pulls back on Wednesday, the window is still open.
Since the market has only rallied one day, I can’t even tell you when we’ll be back to a short-term overbought reading, but if I had to pencil something in, I would notch it in for mid to late next week. If breadth is good on Wednesday, it is my belief that the Oscillator will scoot right over the zero line and begin to push into overbought territory in about a week.
There was something else that happened. On Monday, I explained that the put/call ratio for the VIX had ended the day on Friday at 1.04. I noted that was bullish for stocks because it meant the pros were betting on a lower VIX (higher stocks). Well, on Monday, we got another reading over 1.0 to 1.08.
We do not often get consecutive readings over 1.0. The last time we got this situation was just prior to the election in late October 2024. So, we didn’t even get two such readings in April when the VIX surged. That’s how unusual it is.
In any event, I still take it the same way: if the pros are buying puts on the VIX, I want to do the same. I suspect when Tuesday’s numbers are published, we will see the reading back into more normalized ranges.
The Daily Sentiment Index (DSI) for the VIX is currently 26 (leaning high). If it falls back to the teens, especially the mid to low teens, by the time we get back to a short-term overbought reading, then I’ll once again look for the VIX to head back up.
I want to end by showing you an updated chart of the IWM relative to the SML. The IWM does not have a requirement that companies in it be profitable. The SML does. You can see that big peak (meaning IWM—unprofitable companies—outperforming profitable ones or the SML) in early October, the swoon, and the rally to a lower high.
Now you have to squint really hard to see that the ratio has made a very minor lower low (meaning profitable companies — SML — are outperforming unprofitable ones within IWM). I’d bet all those value investors out there would love to see this ratio continue to head lower.
