The Stock Rally Kept Going—But Fewer Stocks Showed Up
Wednesday’s gain looked strong on the surface, but participation was thin. Here’s what breadth, new highs, and sentiment are quietly signaling.
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Another day, another rally, but Wednesday’s rally had pretty slim participation. I believe it is the overbought condition at work.
Let’s start with the SOX. Sure, it was green on the day, but up fifteen points? That’s not much. This is not bearish, but I think it is a function of being short-term overbought and banging up against resistance.
The Bank Index has been doing more milling around than anything else, and relative to the S&P, it has made a lower high and has been trending down for a week now.
Breadth, which was barely positive on the day, did not make a new high along with the S&P. This is the first time breadth has not kept pace, or even led. Now it won’t take much for breadth to make a new high, but it’s certainly worth watching for a potential divergence.
The number of stocks making new highs on the NYSE on Wednesday was 74, so if you are wondering why your portfolio did not feel as terrific as the S&P, that’s probably why. Last week, there were 140 stocks making new highs on the NYSE, and the S&P was 250 points lower. So yes, Wednesday was pretty index-driven.
The number of stocks making new highs on Nasdaq was better than the NYSE, with 227, but on April 9th, there were 229 new highs. I think it means that the down and outs, like all those software stocks have moved into the spotlight, but that’s why we rarely see what has held up great during a decline be the stocks that rally well coming out of it. The first move up is often shorts running for cover or folks dying to get exposure to the market, and that means index chasing.
All of this is, at least to me, for now, just a sign that the market is overbought. I still think we should see some chopping about and/or pullbacks before we see another rally. I think sentiment has shifted quite a bit this week, but there ought to be some more folks that need to change camps.
The Investors’ Intelligence bulls jumped up to 39.6%, and the bears fell to 22%. The ratio is still only 1.7 so it’s not as though there has been a thorough conversion. I would expect that when we see next week’s numbers, the bulls will be more than two to one.
The put/call ratios have fallen like stones, and since these are the most sensitive to the change, we can sense the bullishness creeping in. The index put/call ratio was .70 on Tuesday, which is the lowest since December 2019. This is how we know the bears have jumped the fence to the bull camp. Oh, not all of them, but the shift is on.
The ten-day moving average of the put/call ratio continues to fall and is now at .91. This is not extreme at all, but I expect it will keep falling. Once it gets to the low 80s, I’ll know everyone is back in the pool.
