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Finally, a Properly Behaved Market

This sideways action is exactly what it should be doing right now.
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For now, the stock market continues to consolidate its gains and work off the overbought reading by going sideways. Please note that the S&P 500 closed last Thursday at 1675 -- so, if it fails to make any progress Thursday, as well, that will mark an entire week of sideways action. Do keep in mind the short-term overbought reading that the market reached last Wednesday. It has been quite a long time since the market has reacted properly to these indicators. I am in shock!

Wednesday's action did not remove the negative divergences -- but, since breadth was good and the Dow Jones Transportation Average was higher, those divergence did make some progress toward filling the gap. The number of stocks at new highs is falling off, as well. But, again, the window is open for these indicators to improve. If they don't do so while the market remains oversold in the intermediate term -- or, at least, before that reading flips to overbought -- the market will be set up for another correction when that time comes.

I should also note that the sentiment indicators are creeping upward. Last week we looked at the American Association of Individual Investors, when the bearish ratio was under 20% -- and, as I noted, it often takes a few weeks before such a statistic will matter to the market. Well, we're now a week past it, and the weekly Investors Intelligence poll shows a bullish ratio above 50%, and bearishness back under 20%. Similarly, the Bloggers Sentiment Poll moved from about 11% bulls to nearly 50% this week.

So, as you can see, there has been a shift in sentiment. It's subtle in the put-call ratio but, believe it or not, we've finally seen four trading days in a row with readings under 100%. That is the longest string since before the May high. Granted, four days in the 80s and 90s is by no means giddy. But, still, it's clear the comfort level is rising from where it had been a week ago, when folks had still been very skeptical.

The place where I have seen the most change in the last week has been in U.S. Treasury interest rates. The five-year has particularly caught my eye: Do you realize that this bond's yield is back to where it had been a month ago? It also broke the uptrend line.

What I find fascinating is that the yield on the 10-year bond broke a similar line, yet it has not made a lower low in the way that the five-year has done. If the latter cannot recapture 1.40% soon, it is likely to come back into the 1.10% area.

The 10-year note, meanwhile, still has support around the current 2.48% level. If it breaks through that, the next support area is all the way back at 2.20%-ish. When I look at the chart of the 10-year, I keep thinking a failed rally back to 2.60% will form a perfect-looking head-and-shoulders top, although the measured target would only be around 2.30%

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At the time of publication, Meisler had no positions in the securities mentioned.