Is the Call Buying Binge About to Get Extreme?
In the short-term, the market is overbought, with high levels of call-buying. We're due for a pullback, but will we get it?
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The Market
I feel like a broken record. The market is short-term (not intermediate-term) overbought, so some chopping and pulling back should lead to another rally. But there is a slight change today.
The slight change comes in the way of the more sensitive (daily) sentiment readings. I saw some data that Friday saw a record number of calls traded. And as we have discussed, the put/call ratio has been falling by quite a lot this past week. Friday’s reading was .66, making it three out of four days last week that the reading was under .70.
On the equity side we’ve now seen the last three days with readings under .50. That brings the ten-day moving average of the equity put/call ratio down to .53. Sure, it can go lower (and probably will) but if this market doesn’t take a breather, or if those call buyers don’t exhaust themselves this will be extreme this coming week.
Then there is the Daily Sentiment Index (DSI), which was a mere 12 for Nasdaq three weeks ago. It now stands at 82 (the S&P is at 81). As a reminder, this is on a scale of zero to one hundred. A reading in the low 80s is where I take notice. A reading over 85 is a yellow light (just the same way the reading at 12—under 15—was important near the lows). Over 90 and bells are going off.
Oh, I could cite to you that the big new highs we saw on Friday had fewer stocks making new highs on both exchanges than we had seen previously, or I can say the software stocks appear to finally have exhausted the short coverers, or that the Bank Index still hasn’t made a new high, and has traded pretty poorly last week. Or I can note the industrials and materials are pretty laggy. But that stuff matters when the intermediate term is also overbought and/or the sentiment gets extreme.
Friday’s rotation moved to the staples and some drugs so that W pattern in (XLP) is working for now. But if you were going to make an economic story out of this, then why did staples rally while materials and industrials sat it out?
New Ideas
I was asked to update my view on Bristol Myers (BMY) , a chart I was quite positive on last fall. It had a terrific run and has been consolidating for the last two months. Earnings are out on April 30th (reminder: I do not like to ‘play’ earnings), but as long as BMY stays over this mid-50s area, it looks okay to me. If it trades over 62, that would be a bonus.
Today’s Indicator
As noted above, the number of stocks making new highs is bothersome but will become worrisome if it is still low when the intermediate term gets overbought and/or sentiment gets more extreme.
Q&A/Reader’s Feedback
After being a fan of Nutrien (NTR) for the longest time, I turned sour on it in March when it developed that island reversal. It’s got some support in that 66-68 area, but I am not ready to commit to it again until/unless it develops a better base/launching pad.
I have been a fan of Pfizer (PFE) for quite some time because of this massive base it has built on this three-year weekly chart. On a short-term basis, I have no strong view, but as long as this stock stays over that 26-26 area, I am hopeful it can eventually break out over 29.
Sempra Energy (SRE) has completed the 90/100 rule (90% of the stocks that get to 90 will get to 100). Like most energy stocks, it is oversold, but I haven’t been a fan of energy for several weeks now, and while I can see myself warming back up to them in the months ahead, for now, I say short-term oversold, but that’s the best I can say. If it rallies from here and then comes down to 90-ish, I might like it better.
Darden Restaurants (DRI) is trying to hold and form a little bottom. I have warmed up to some of the restaurants of late (CBRL a few weeks ago, MCD last week), and I would say DRI is probably in a trading range for now: 190-220. It’s wide, but it did break out of a head-and-shoulders bottom in January, and this recent pullback looks like a return to the breakout.
Lamb Weston (LW) has been terrible, but the rally this month has helped it. From here, it would be chasing, something I am terrible at. But if it pulled back to test that downtrend line (42-ish), I would be a buyer.
