Everyone says sentiment doesn’t work anymore. I say nonsense. It doesn’t work with instant gratification as it used to a decade or more ago, but it still works. I will even give you an example.
In early September when Apple (AAPL) announced the iPhone 8 and X, folks were ecstatic. The cry was you had to own Apple. Then it fell — 10%! — and at $150 there was a list of reasons why you had to be cautious on Apple; sales of the iPhone 8 weren’t so hot, reviews were awful, etc. I remember I even wrote a column on the stock the day it traded under $150 and said it filled a gap and now everyone hates it, therefore it should bounce. (Apple is part of TheStreet’s Action Alerts PLUS portfolio.)
Here we are three weeks and 10 points higher, and all of a sudden folks are loving on Apple again. If you don’t think price changes sentiment, then you are not paying attention. It might not work as easily and readily as it once did, and nothing works 100% of the time, but it does still work.
Let me point out that the Daily Sentiment Index (DSI) for the S&P 500 first jumped over 80 during the first week of October. Nasdaq joined it last week. And the Russell 2000 hasn’t made a higher high in two weeks; it has been down relative to the large-caps since the calendar turned to October. So some stocks are paying attention to the DSI.
Sure, I know everyone wants to see a giant whack, but that’s not the market we have. The market we have creeps along and corrections are of the variety where there is some weakening underneath, but not enough to concern folks, until all of a sudden, folks realize the market isn’t doing so hot. You do remember August’s decline, don’t you? It wasn’t much in the S&P 500, but it sure was something in energy, banks, small-caps, etc.
This is why I draw your attention today to a very curious statistic from Monday’s market. The put/call ratio for ETFs was 310%. That is incredible since it typically only soars like that on a sharp down day. In fact, since the 2009 low, I only see eight times this indicator has gone over 300% (I’m fudging a bit here because once it was 291% and I’m counting that).
You would think it would be bullish, being contrarian. But it turns out it’s not as bullish as I expected. Even when it arrived in the midst of a decline, there were still a few more days of downside to come. But the most curious point in time was August 2013.
I am sure most folks remember 2013 as the year without corrections. Yet in fact there were corrections that year. Look at June: 5% in four days. That’s a correction! But the reading over 300% arrived in early August, right near the highs (circle on the chart). And it essentially preceded a 5% correction over the next few weeks.
I said two weeks ago I thought we’d see an uptick in volatility and thus far I have been wrong. But when I see a reading like this, I have to say I still think volatility will come our way.
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