The major stock indices took it on the chin to begin the new week, following through from Friday’s decline. Coming in to the week, I said that unlike the previous week, it was now time for the bulls to take a stand. If they didn’t then a full re-test of the January low was likely up next, something that makes me a little uncomfortable because it shouldn’t be this quick. Should this test fail and the S&P 500 close below 2015’s low, it would open up a new scenario of very sharp and fierce trap door selling.
For most of Monday’s trading, the bears were firmly in control and it was on the verge of getting ugly. The last two hours saw the bulls roaring in to close the indices well off their lows. Monday’s lows were not uniform as the Russell 2000 and NASDAQ 100 exceeded January while the Dow, S&P 500 and S&P 400 did not. Once again, we have another opportunity to see at least a trading low. For that to happen the bulls need to defend this week’s low and make some upside progress by the end of the week.
Sentiment is once again cycling back towards overly pessimistic and the new COT data on small speculators has reached levels where good rallies have developed. It has been a solid indicator with the exception of 2008.
On the sector front, transports have gone from laggard to leader, but it’s not time to celebrate that just yet. Banks, semis and discretionary are still not acting well and that needs to change. Staples, industrials, materials and energy have become leaders, but those are typically not the groups in healthy rallies.
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