Bit of a Nosedive for Nasdaq as Sentiment Shifts

For three days, the S&P 500 hasn't budged. And on Thursday, the Nasdaq closed lower than it closed on Monday. It was by mere points, but that is a change from what we've seen most of the year. Nasdaq has led rallies in 2017, not the kind that stall out and see the index close lower than a few days prior.

And while breadth remains relatively strong, the number of stocks making new highs contracted again. The only good news is that the number of stocks making new lows has not increased.

But the real shift was sentiment. Two days ago, I noted that the Investors Intelligence readings showed 47% bulls, which were likely only tallied through last Friday. While this reading is not bearish, I did note I expect it will move up with next week's readings, likely to the 50s.

The place we saw the big shift came in the weekly American Association of Individual Investors readings. Bulls shot up to 41% and bears sunk to 22%. This is the highest reading for bulls since January -- so that tells you something about sentiment. It was also the lowest reading for bears since April 2016 - again, that says a lot about sentiment: a drop from 40% bears to 22% bears is a drastic change.

For the third day this week, the put/call ratio for ETFs sunk under 100%. We don't often see that. We last saw three readings together in mid-March just before the S&P 500 went from 2380 to 2320.

Then there is the ISE call/put ratio's 21-day moving average. It ticked over 100% on Thursday. Typically when it goes up over 100% and then turns back down, we see the market correct. It last did this in early August.

Couple this with the overbought reading in the oscillator and it seems to me we have some sort of correction coming our way. But with breadth as strong as it's been, I don't expect much severity.

I was asked to revisit the chart of the Dollar Index. I was asked if I thought it had formed a base. The answer is no. It is in a downtrend. Lower lows and lower highs are the definition of a downtrend. To make this chart a base, it would take several factors. One would be time; you just don't build bases in a day. You can make a low in a day but not a base.

The second thing would be some higher highs and higher lows. So let's just draw in how it could start to look like a base. Notice that move would take weeks, not days. And that would be just to get a higher high and a higher low. It still looks like a countertrend rally to me, and I would note that sentiment began to shift rapidly after the third day up.

And quite frankly, that downtrend line (black) would need to be broken before you could see any sort of bottom.