This market has more moves than Barry Sanders. Whenever volatility picks up like it has in the past two weeks, I like to go back to my basic indicators to help me find my bearings. Overall, while price action continues to be bullish, sentiment indicators are starting to flash caution signs. So while the market could move higher, it does so at the risk of suffering more sharp corrections as bullishness reaches an extreme.
The broad NYSE actually hit another all time high on Friday…
…but breadth is lagging, as shown by the number of stocks above the 50 day moving average which has remained on a sell signal through most of this beginning-of-the-year rally.
The NYSE Summation Index looked like it would roll over last week but caught itself and is acting a bit better.
The NASDAQ shows almost the opposite characteristics of the NYSE. Price on the NASDAQ still hasn’t broken the recent highs but breadth is very strong. After looking like a fakeout two weeks ago, the recent rally now looks more like a breakout.
Breadth as measured by the Summation Index and the number of stocks above the 50 day moving average has remained on a buy signal.
So everything should be fine, right? Not so fast, my friend.
The one problem is that bullish sentiment is relatively high. While it’s not a good timing indicator, it will be hard for the rally to continue higher off of such bullish readings. First, the number of bulls in the major sentiment surveys has reached levels that have coincided with highs in the market.
Second, the put call ratios of the major options exchanges are all hanging at lows, not highs, indicating that traders are betting on the rally continuing. The Equity Put Call ratio has been whipping around and is currently on a buy signal. However, the absolute level of the 21-day moving average (0.55) of the put call ratio is closer to a level associated with market tops.
The Philadelphia Options Exchange put call ratio is also showing a fair amount of optimism, especially compared to the levels seen at the October and June market lows.
While stock prices are indicating a continuation of the bullish action, the sentiment indicators are troubling. I would assume that stock price momentum could continue higher in the near term but sentiment indicators would then move clearly into the sell range. A blow-off move higher, such as the gold stocks have seen, is also not out of the question. Therefore, I think the next several weeks could challenge the bulls as well as bears as the market tries to confuse all participants.