As Sentiment Closes In On Extreme, Which Way Will This Chopfest Break?

The Market

More chop today.

Sure, a lot of stocks are not participating, but I did say that if they can chop around to work off the overbought reading, then maybe they ought to be able to rally again. So far this entire week has been a chopfest.

Let me note that the McClellan Summation Index for the NYSE has lost much of its cushion. By that, I mean it will now require a net differential of -900 advancers minus decliners on the NYSE to halt the rise. I view this indicator as important for the overall market; its direction tells us a lot about the health of the market.

The Nasdaq’s Summation Index is still rising as well. Here I use volume. A net differential of -2 billion shares (up minus down volume) will halt the rise in that indicator. This is why I focus so much on breadth.

We already know the new highs aren’t great, but unless/until the indicators roll over, they get the chance to improve.

Then there is sentiment. Now there’s a change. The bears jumped the fence in a big way.

The AAII bulls jumped nearly 15 points to 46%. This is the highest since January. The bears fell eight points to 34.4%. This is the lowest since late January. There are more bulls than bears for the first time since January. So I consider that a big change in sentiment. Call it knocking on the door of extreme.

Then there is NAAIM, where we never saw folks get too extreme in reducing their exposure (they came down to 60), but they are now up at 94. As a reminder, in December, this metric was over 100, which I consider bearish. They too are knocking on the door of extreme.

Should the market manage another rally and we see breadth lag, forcing the Summation Indexes to roll over and the new highs to stay pathetic, that would be bearish because sentiment is knocking on the door of extreme. And if we rally again, I suppose it is possible that sentiment will push over to extreme.

So that’s what I will watch in the coming days/weeks.

New Ideas

I was asked if Snowflake (SNOW) was buyable into this pullback. I think it bounces, but I’m not sure it is getting farther than resistance in that 155-160 area. I like to keep in mind how big the tops were and how long it ought to take for these stocks to build bases. It remains a stock in a downtrend. Unless/until it can cross that downtrend line, it’s hard to see it any other way.

Today’s Indicator

The ten-day moving average of the equity put/call ratio is now the lowest it has been since July 2023. This is not knocking on the door of giddy; it has pushed through.

Q&A/Reader’s Feedback

One point I want to make about the requested charts today: notice they are all gaps down and on earnings. That is not great action during earnings season.

If we use the Sentiment Cycle chart on IBM (IBM) , then today’s gap down would be ‘aversion’. But let’s put the analogy to the side for now and note it bounced right off support, so on a trading basis, it ought to rally. But I don’t think it can make it all the way back to fill that gap. What I do know is that if it breaks 220 in the coming weeks, it would be bearish, so that’s the stop.

Based on the head and shoulders top that Lockheed Martin (LMT) broke down from, the measured target is 520, which is essentially where it is now. It is oversold enough to bounce, but that’s the best I can say right now because you’re catching a falling knife. I suspect a bounce and back down.

Medpace (MEDP) is almost out of a textbook: gap down, slow rise to fill the gap, and another gap down. What I don’t like about today’s action is that it gapped under an uptrend line and made a lower low than February. If it can rally to 435-440, I’d be inclined to take my money and see if it can hold on the next trip down.