It took two days and an early day give-up of a rally for folks to get despondent. OK, not despondent, but that complacency we have discussed for the last few weeks has evaporated. Thursday, I noted the put/call ratio had gotten high again.
But there’s more.
Just take a gander at the American Association of Individual Investors (AAII), who are more like day traders than investors. The bulls collapsed nearly 13 points to 21% this week. The bears jumped 8 points to 36%. That means once again we have more bears than bulls in this survey.
The National Association of Active Investment Managers (NAAIM) dropped their exposure from 85 two weeks ago to 57 this week. That is their lowest exposure since early January.
I don’t think the bearishness is pervasive, but the complacency is gone. Folks are definitely on edge and that has been creeping up. The 10-day moving average of the put/call ratio has gone from .85 to near 1.0 in the last two weeks.
Thursday, I wrote about minor changes that I had seen in the statistics from Wednesday’s action. Thursday brought another minor change: bonds did not sell off during the midday downdraft. In fact, bonds — perhaps for the first time in weeks — did not lead stocks lower on Thursday.
I realize we get (yet another) important inflation data point on Friday that could easily flip the bonds back down, which is why I note the change as minor.
Aside from that, the indicators did not change much on Thursday. Some of the intermediate-term indicators continue to head from overbought toward oversold. For example, Nasdaq’s Hi-Lo Indicator is now at .47. Two weeks ago it was just shy of .80. It began this week near .60.
You can see the Overbought/Oversold Oscillator ticked up every so slightly, as well. But there is nothing dramatic in these moves. They don’t change that in the short term we got oversold, but the intermediate-term indicators are simply in the midst of moving lower.
That tends to be the challenge for swing traders like myself. At some point in the middle of the swing we should go the other way. In this case we’re swinging down and we should have a small relief rally before resuming the down move. But by now folks have started to turn bearish, but not bearish enough to make me want to jump in and buy.
Sometimes it is easier to think of it the other way. We’re in the midst of a rally, but it’s time for a rest, a set back, before we resume the rally again. Think of what happened in mid-January: a quick 100-point decline in the S&P 500, before it resumed upward. None of the indicators changed in that quick decline, but it was enough to relieve that short-term overboughtness.
Then at some point the initial move resumes and we can see if there are positive divergences (in a decline) or negative divergences (in a rally) as the intermediate-term indicators reach an oversold (in a decline) or an overbought (in a rally). So we’re stuck in the middle.
Lastly, I recorded a podcast with Howard Lindzon “Panic with Friends” last week. If you would like to listen, here is the link.