Here Are the Indicators I'm Watching Right Now

Let's step back and take a read of some of the indicators I'm keeping a close eye on.

Author:
Helene Meisler
Publish date:
May 26, 2020 6:00 AM EDT

There are certain indicators that I lean on, some more than others. I am a big fan of breadth, since the bigger the breadth of the market, the better the market is and the more narrow it is, the more tenuous the market is.

For example, currently the fact that the cumulative advance/decline line (red line) is still so far below its late April peak is concerning to me. Heck, it's even below its early May peak as well. You can see the divergence was not nearly as great in February, but there was a divergence.

Sticking with breadth, I also like to smooth it out by using the McClellan Summation Index. When it is rising, the majority of stocks are rising and when it is falling, the majority are falling. So while the breadth of the market is at a lower high right now, the Summation Index is not falling. It has been in what I would term "chop" mode for about two or three weeks now.

Also, when it comes to breadth, I like to see how many stocks are making new highs or new lows. Currently the number of new lows is minimal. The number of new highs, though, is not expanding, especially for Nasdaq, where the new highs peaked about two weeks ago. When there are fewer stocks making new highs, it is harder to make money on the long side.

In the case of Nasdaq, there were 120 new highs, two weeks ago and Friday there were 72. Basically, that means 50 stocks that were cruising along in early May are not cruising anymore, yet Nasdaq is nearly 200 points higher.

I also like to monitor sentiment. One of my go-to indicators is the put/call ratio. When it gets extreme in one direction, it has often been a good tell. It tends to be terrific at lows, when it gets extreme, but at highs it is more nuanced and spotty. In fact, most indicators are better at lows than highs. I believe it's because of several factors, among them it is human nature to buy, not sell, and because the market goes up over time.

The 10-day moving average of the put/call ratio is getting quite low. It is not quite extreme. Under 80% would be extreme; it is currently 86%. This weekend I decided to plot the Summation Index (black) with the 10-day moving average of the put/call ratio (blue). If you look at 2019, you can see the swings quite easily.

The current position of the Summation Index is choppy, since it hasn't had much direction in about two weeks. It would currently take a net differential of negative 1,600 advancers minus decliners to halt the small rise it has now, so I consider the indicator neutral to bullish. Should it turn down -- and it would take more than one bad day to do so -- and the put/call ratio's moving average turn up, then you can see we'd likely be in for a proper correction. In other words, they are best used together. Right now, they both still say choppy.