The Bears Will Migrate to the Fence Before They Become Bulls
Let's check in on sentiment.
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You know what’s happened to breadth since we got everyone excited about the Breadth Thrust? Absolutely nothing!
Last week, we looked at the chart of the S&P in 2023 to see what transpired after not one but two breadth thrusts. What did we see? In one instance, the S&P went sideways for nearly two months, and in the other, the sideways move lasted about a week or so.
Take a look at the chart of IWM, where we can already see the sideways action taking place. There was that Wednesday high, the rebound Thursday that couldn’t quite make it to Wednesday’s high, and Friday’s chop-fest.
There is also all that resistance overhead (the flat line just over 195). Resistance should be thought of like that old joke: how do you eat an elephant? One bite at a time. It needs to be chewed through. Folks who didn’t sell at, say, 200 on the way down, are thrilled to get back to even. C’mon, we’ve all been there before, praying to the Market Gods: just get me back to even.
You see, we only get a Breadth Thrust AFTER breadth has been good for an extended period of time. So it makes a lot of sense that it is followed by chop, doesn’t it?
We are now overbought. It’s easy to see it on the chart now, as the Oscillator has stretched back up to the top of the page. The good news? If you squint, you can see the Oscillator is at a higher high than it was in late January. Nasdaq’s even beat out the July high.
I don’t tend to fuss over Nasdaq making a higher high or lower low as I do with the NYSE because breadth on Nasdaq is just different (too many penny stocks). You can see the lower low in April. If we thought that was bearish, we’d be wrong; thus, no fussing over a higher high now.
But let’s take a look at the Nasdaq Momentum Indicator to see when it gets overbought. I have walked Nasdaq up about 700 points over the next week, trying to get it to that mid-March rally peak. You can see the Momentum Indicator peaks on Friday, May 2nd. As a reminder, this is not meant to pick the exact day but rather to give us a window into when it’s overbought (upside momentum wanes). Let’s call it this week.
Friday basically saw the Index Movers back at work, and as is the routine, they tend to do so at the expense of the 493 (thus that chop-fest in the Russell 2000/breadth). I expect we’ll see that anecdotal bullishness begin to perk up, especially if the Index Movers get the love. Friday saw the equity put/call ratio at .46, so it has begun. This coming week, we’ll see if the survey data shifts as I expect it will.
I know everyone wants everything to happen quickly, but the market tends to take time. And as we have discussed before, sentiment rarely goes from bull to bear quickly, rather, folks tend to become fence sitters as they shift.
