I'm Taking a Fresh Look at the Market -- Here's What I Found

This key indicator has made a change, and here's what it means.

Author:
Helene Meisler
Publish date:
Jun 22, 2020 6:00 AM EDT

When I step away from the markets for a week, I find it helps to come back and see the market through different eyes. Sometimes it's because I haven't been staring at charts and screens for a week, and sometimes it is because something has shifted in the market.

This time it might be a bit of both, but it's a change in the McClellan Summation Index that has caught my eye. Long-time readers know that I see this indicator as a guide to tell us the direction of the majority of stocks. When it is heading up, the majority of stocks are as well; the downside is no different. Sometimes the indicator simply takes a break from the direction it is going-a mere blip-before resuming the trend it was already moving.

Notice that the Summation Index peaked in January, started down, took a break in early February to go sideways, and then resumed its decline into the March low. It has had a few sideways moves and even a short one week dip in mid-May since March, but it has been steadily upward since then. Almost two weeks ago, this indicator stopped going up. It is now starting an attempt at rolling over.

Right now I'd consider this sideways action, so let's talk about the numbers behind it. It will now take a net differential of positive 2,000 advancers minus decliners to halt the decline (obviously it would require more than that to turn it back up). That tells us that there has been some -- only some so far -- deterioration underneath these last few weeks.

When this requires positive 2,000 or greater to turn back up, it means we have dipped a toe into oversold territory (on a short-term basis). At positive 4,000, it is solidly oversold -- meaning the market is solidly oversold. That means should the market go down and breadth is poor on Monday, it is possible we get oversold midweek this week on a short-term basis.

Right now, I would put this indicator on the negative side of the ledger, but it would be there in pencil.

The next chart is that of the small cap fund (IWM) . It has not broken the uptrend line (black). I consider that uptrend line a good one, because there are four touches, and if two points make a line, with a third confirming it, four points is a good line.

Then there is that very solid support line at $135 (blue line). It is even more important now, because it is possible the IWM is developing a head-and-shoulders top, but that would take a break of $135 to complete. Therefore the uptrend line and the support line are what I suspect most will be watching.

The equity put/call ratio's 10-day moving average has finally risen from the ashes. It is now back to the same levels it was at in January and February, so I would say complacency is still alive and well in the market, perhaps just not as extreme as it was.

I will be more interested to see if the Summation Index really rolls over from here than I am about the price chart of the small caps. Because if the Summation Index rolls over that will tell us there has been deterioration underneath which would eventually show up in the indexes.