The Market Isn't Very Stretched

Sometimes it is incredible to see the shifts in sentiment in the market and how quickly they unfold.

Right around Thanksgiving, when my intermediate-term technical indicators were reaching overbought extremes with negative divergences, my inbox was full with "But seasonality --" emails. Folks were insisting that the market wouldn't or couldn't decline between Thanksgiving and Christmas. I lost track of how many statistics people cited about the great market returns we would see for that seasonality trade.

Here we are, two weeks later and with the S&P500 trading 4% lower, and much of the seasonality chatter is gone from the mass media. Oh, don't worry, it's still around, but it is much quieter now. Still, on an anecdotal level, I am not hearing anyone who really believes the market can break much technically in the final two weeks of the year. Since I am not one who cares about seasonality, let's check in on the indicators.

The first thing we'll notice is that the Dow Jones Industrial Average, the S&P and the Russell 2000 all finished last week within fractions of their 50-day moving-average lines. That is a very obvious support level. Typically the market bounces at these lines, or at least attempts to stabilize at such levels. So we should not be surprised if Monday brings a rally attempt.

If we look at the NYSE Overbought/Oversold Oscillator, we see it appears to be oversold. This represents the 10-day moving average of the net of the advance-decline line, so for this we must look back to see if the moving average is dropping a string of red numbers -- as this, after all, is what creates a "good" oversold condition. Well, in the past 10 trading days we have seen only five red sessions, and there have been no instances of two consecutive negative days. So we are not yet looking at a good oversold condition.

You can see that, at the October low, this indicator spent quite a lot of time in oversold territory, and eventually we saw a positive divergence (red line) when the S&P kept sliding and the Oscillator hit a higher low. That is not the case now.

The good news is that, during the S&P's 33-point decline on Friday, market breadth was better than it had been during Wednesday's 33-point slide. Improving breadth is the first step on the way to positive divergences. But, as of now, there are none.

At the moment, none of the intermediate-term indicators is reading as oversold. We looked at the Hi-Lo Indicator last week, and while it has pushed downward, it is not close to an oversold condition. There are no positive divergences, either: The number of stocks making new lows expanded to 370 on Friday, up from 306 on Monday. This lack of positive divergences, and the fact that we haven't seen enough of an explosion in new lows, means we cannot believe we have seen an extreme.

Early in the week, much of the market's move will be dominated by the elections out of Japan, and then a focus on the Federal Open Market Committee (FOMC) meeting on Wednesday. So, in the short term, the market can bounce, but I don't think there is much in the indicators I follow for me to believe it will go very far at this point. We'll need some short-term extreme, positive divergences, or the intermediate-term indicators will need to read as oversold.

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