Earlier this week I said it was my sense that folks would be keen to buy dips. Seems like they did so today. But let’s talk about the indicators.
We will be intermediate-term overbought midweek next week. It is a holiday week and I’m certain there will be a gazillion statistics floating around about seasonal tendencies during Thanksgiving week. My guess is that this market will not turn south from the overbought reading easily.
Why is that? Because see the first line above: Folks who missed the rally are keen to buy the dip. Remember that in the summer -- by around July 4 -- we started hearing "the bottom is in"? We don’t hear much of that today. Instead today we hear, almost in unison, that we should rally into year end and then, just wait, those fourth-quarter earnings reported in January will be bad and that’s when the market will head down again.
Has the market ever been so accommodating to so many? Those same folks were screaming that the S&P 500 is going to 3000 in late September. So, I suspect there is still a bit of "buying the dip" to come. But the signs are there that December could be a volatile month.
First, there is the aforementioned overbought-ness. Then there’s the failure of new highs. The McClellan Summation Index has not turned south yet. It still needs one more day of poor breadth (negative 1,000) to do so. Usually it is easier for the market to go down if this indicator is heading south already.
Then there is sentiment. Yesterday’s equity put/call ratio was off the charts. Literally. It was 1.46, which is the highest I have seen since I started tracking equities only more than two decades ago. On its own that ought to be unwound at some point in the next week or so (i.e. market should rally) but overall, let’s look at some of the moving averages. We don’t look at the 30-day moving average of the total put/call ratio often, but you can see it is just now curling up again. Those two prior lows came near the April highs and the August highs. So, a high reading now will turn this moving average up.
Then there is the conversion we’ve seen in the surveys. The Investors Intelligence bulls we looked at yesterday, with 38% bullish. The AAII bulls are now at 33%, which turns out to be the highest of the year. Don’t get excited: It only exceeded the prior high reading by .2, but it shows the conversion.
The National Association of Active Investment Managers exposure has lifted to 65, which is getting awfully close to that 72 reading we saw in August.
We discussed the Volatility Index the other day. I would like to see it a bit lower than it is now. For several reasons. First, because the Daily Sentiment Index for the VIX is at 29. That is the lowest reading since Sept. 12. In August the DSI for the VIX was 11-12 so if the VIX falls now the DSI should get to the teens quickly.
Also the put/call ratio for the Volatility Index has not given us a reading over 1.0. That is highly unusual. Remember this is mostly played by pros and it seems they are not betting heavily on a lower VIX in the next month. If they were, we’d see much higher readings than we’ve seen.
Finally, I was interviewed by Dale Pinkert today on where I think the market is. Check out the video by following this link: https://www.youtube.com/watch?v=l6d4ZtRdgzc .
The other day I said we needed to watch the chart of SPDR S&P Metals & Mining ETF (XME) - Get Free Report, because it was one of the few charts that had crossed the downtrend line and we needed to see if it was a false breakout or real. The jury is still out but you can see today it bounced off the line. Now we see if it can make a higher high or if it heads down under today’s low.
There are a lot of charts that got saved today, but will there be follow through buying that can take them over the highs?
The 30-day moving average of the put/call ratio is discussed in full above, with the chart.
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Arista Networks (ANET) - Get Free Report is up against resistance. I’m not even sure I would trust a breakout over $135, but that’s the level to watch. Why wouldn’t I trust it? Because that spring high at $144 is in the way, as well as a gap at $140. In other words, that "breakout" would likely get stuck pretty quickly so it would be a quick trade.
GSK (GSK) - Get Free Report might be the only drug stock still acting like a worn-out tech stock. But it is interesting down here. I’d be inclined to buy it with a stop under $31. I think patience will be required but a move over $34 at least gets the ball rolling.
I would very much like to see Alphabet (GOOGL) - Get Free Report fill that gap around $102 and meet that downtrend line ($101-$102) before this rally is over. I think that will happen as long as it stays over today’s low (around $96.50).