The Up-Down Market Will Change, so Be Ready – RealMoney

When the market reversed on Monday, I saw many folks get quite excited.

At the time, I dismissed it as too anecdotal, because we didn’t see that same excitement appear in the statistics. But here’s something even more anecdotal: By Thursday those same folks were screaming, “Sell!” Those same folks who were bullish two to three weeks ago and even Monday are bearish now. And decidedly so.

If we rally, they will probably change gears again and turn back to bullish, but at least as of now they have stepped into the give up phase. They have given up looking for a rally. And how can we blame them? I thought Nasdaq would rally this week and, so far, that has been a terrible view to have.

We did see a minor uptick in the American Association of Individual Investors bulls to 23%, but mostly we saw folks escape from the neutral camp and fly into the bear camp as bears ramped up to 53%, levels not seen since March 2020 and prior to that spring of 2013, during the Taper Tantrum. I am a fan of tracking the four week moving average of bears for this particular survey (because they jump around like day traders, this tends to smooth it out and show persistence when there is some).

The four week moving average is now kissing 43%, which is closing in on the March 2020 high of 50% and the December 2018 peak of 47%. So yes, this cohort is getting quite bearish now, too.

What of the Daily Sentiment Index (DSI)? Nasdaq’s got to 13 on Thursday. The interesting part is that now the S&P has joined it as a teenager, as the S&P chimed in at 17. Earlier in the week the S&P was still well over 20.

I don’t need to tell you how oversold we are. You can feel it, you can see it. Breadth has been red for 10-straight days, which is very unusual. Nasdaq has only had two or three days of positive breadth in the entire month of January. Admittedly we are oversold and not able to rally. But technically we didn’t move to an oversold condition until Thursday and the New York Stock Exchange only joined Nasdaq now, as well.

So we have an oversold market (that might not be able to rally; we’ll know for sure early next week). We have sentiment pretty bearish, although it can get more bearish. And for now we have a peak reading for stocks making new lows last Monday that has not been breached. All of this should lead to a rally.

Yes, I know we seem to get a rally every morning and every afternoon that rally deflates to selling. One day that pattern will change (it always does) and since that pattern has now been so persistent maybe it catches folks by surprise.

Finally the Volatility Index was actually red on the day (the first time in seven days) but that doesn’t mean I expect the volatility to be gone. That, for now, should stay with us.