Market Breadth Holds Up Even as Stocks Stall

I have been gone for 10 days. I figured surely the market would have moved strongly in my absence but that was not the case. The S&P added all of 7 points in the time I have been gone. Nasdaq did better at adding 50 points as did the Russell 2000 with an addition of 15 points. The latter two are still less than 1%.

Just prior to my time off I had noted I expected the market to return to an overbought condition mid to late last week so it is not terribly surprising that it has stalled out. Breadth has been good, even though three days last week it was red. Two of the red days were barely red so only one day was solidly skewed toward poor breadth.

That's why I was surprised to see that the McClellan Summation Index had stopped rising last week. It will only take a net differential of +300 advancers minus decliners to turn it back up, but why has it lost the oomph to the upside so easily especially when the small caps haven't been weak? I don't have the answer but I can tell you this speaks of some underlying tiredness.

What also speaks of underlying tiredness is the fact that the number of stocks making new highs has started to contract. Nasdaq's new highs peaked on June 6th at 336. By Friday there were only 167 new highs and a marked increase in stocks making new lows.

I also have my eye on the semis, especially as they relate to Nasdaq overall. For the last nearly two years the SOX has been leading Nasdaq. It peaked around Thanksgiving last year and has not been able to regain its leadership role. Last week it made its second lower high (to go with the lower low in May). Nasdaq has been doing great lately but the SOX has lagged this year.

On the sentiment front despite the choppy market last week the equity put/call ratio was 50% two separate days (as a reminder under 50% and I consider it bearish). This speaks of complacency. If we take the 10-day moving average of the equity put/call ratio we see it is now nearing the levels it was at in late January, which means sentiment was too bullish.

The Daily Sentiment Index (DSI) for the VIX is now back under 9 which also speaks of a high level of complacency. I think based on these indicators the best the market can do in the near term is chop. A pullback is more likely.

Finally, just prior to my departure I noted that I was waiting for sentiment on Gold to get very bearish and that a move down into the low $120s on GLD would probably get us there. Friday's move is getting very close to support around $120. The top defined by the red lines measures to $119-$120. The DSI on Gold is now 9. So we're getting close to a rally there.

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