As of midday Friday, the S&P 500 was down just over 3.5 percent for the month of February. If the index loses ground for the month, it would snap a ten-month winning streak and it would be only the second losing month since the presidential election.
The Dow also has a ten-month winning streak while the Nasdaq has a seven-month winning streak. Both of these indices have also only had one losing month since November ’16 and February would be the second losing month in the last 16 months.
All three of the indices had seen their 10-month RSI rise above 90. My charting software only allows me to go back to 1990, but the 10-month RSI on the Dow has never been above 90 since then. The S&P and Nasdaq saw their RSI above 90 back in May 1996, so we were looking at historic overbought levels based on this indicator.
The volatility at the end of January and beginning of February brought the RSI on all three indices down from their historically high levels, but they are all three still above the 70 level which is the traditional demarcation point for being overbought. It will likely take a couple of months of increased volatility and declines to get the indicators out of overbought territory.
The sentiment toward stocks was showing historically high levels of optimism on January and the volatility in February has brought those indicators down as well. The Investors Intelligence survey saw the ratio of bulls to bears exceed 5:1 for three straight weeks and that was the first time since 1987 that we had seen that happen. The last three weeks of the survey have seen the ratio between 3.32 and 3.6. That is still a little higher than the historical average, but the two-week pullback definitely toned down some of the optimism.
The sentiment survey from the American Association of Individual Investors (AAII) was also showing extreme levels of optimism. Back on January 4, the bullish percentage was at 59.75 while the bearish percentage was only 15.56. This put the ratio at 3.84 and that is one of the three highest ratios in the last 14 years.
From my perspective, the increase in volatility and the two-week pullback we saw a few weeks ago were good for the market. We saw the oscillators move down from historic overbought levels and we have seen some of the optimism removed from the market. While we could see continued choppiness, that would also help to remove more optimism from the market and bring the oscillators down even more. Both of which would be good for the market long-term.