Key Takeaway: Price action has a way of changing sentiment, and the recent bout of strength has brought signs of hope. Optimism is on the rise with an uptick in bulls, a rebound in both the II and AAII bull-bear spreads, and an increase in exposure by active equity managers. Yet, bears linger and the drop in put/call ratios is driven by decreasing put activity. This speaks to less of a risk-off tone rather than a definitive sign of risk-on behavior. Though optimism is in the air, it’s going to take further improvements in trend, momentum, and breadth for bears to change their tune in support of a sustained rally.                   

Sentiment Report Chart of the Week: Breadth Backdrop Improving

The rally off of the mid-March stock market lows has investors feeling better (or at least less bad). This improved mood (and the rebound in price that helped fuel it) will likely have more staying power if it’s accompanied by a better breadth backdrop. We are heading in that direction, but there is still work to be done. This week we finally had a day with more new highs than new lows (for the first time since the second trading session of the year). Building on that and getting the 10-day net new high number back in positive territory could help small-caps get back in gear. We’ve also had nearly 50% of S&P 500 stocks close at new 20-day highs. Getting above 55% would fire the first breadth thrust in our work since June 2020 and move the market into a bullish breadth thrust regime. The caveat: close but no cigar works in horseshoes and hand grenades but not breadth thrusts. A failure to build on recent strength could be met with disappointment from a price (and then sentiment) perspective.