Earlier this week, I thought the pattern might be a pullback early in the week, followed by another rally attempt in the latter part of the week. I am still in that camp but I would prefer to spend today discussing the indicators and how they have sagged over the last few months. To me, this is more important than what transpires in the coming days.
Let's begin with sentiment. Last week I discussed how the 21-day moving average of the ISE ratio has rolled over. In the past that has been a precursor to a market correction, although the rollover is not always coincidental with the market rolling over; it can just be an early warning. I have not found an instance yet where we did not sell off after this indicator peaked.
This week's Investors Intelligence readings showed a marked change in sentiment. The bulls fell off a cliff. A few weeks ago, there were over 57% bulls and now there are 47.5%, the lowest reading since mid-January. The bears have jumped similarly in that there are now the most bears since mid-January, but they remain relatively extinct at 15.8%.
So let's compare the indicators in the market now to the indicators in the market in mid-January, beginning with the Cumulative advance/decline line, or breadth of the market. At present, breadth (blue line) has made a lower low and has not been able to recapture that level. Notice that in January (boxed on the chart) as the S&P 500 (brown line) traded to lower lows, breadth was making higher lows. January had positive divergences whereas now we have negative divergences.
Taking a look at the McClellan Summation Index, which uses breadth as its input, we see in January there was a higher low in the indicator (blue line). Currently, the S&P is near its high and the Summation Index is making lower lows (vs. March). That's deterioration, not improvement.
Now let's examine the Overbought/Oversold Oscillator. In January, when it got this oversold the market rallied sharply; now, we got this oversold and we had a two-day rally, barely able to recapture the previous loss. But away from that, notice how the Oscillator has continued to make lower lows and lower highs for the last six weeks. The last time we saw this sort of action in the Oscillator was August of last year (boxed on the chart). As you know, that was not a great time for the market because, essentially, it was preparing for the October slide.
Finally, take a peek at the number of stocks making new highs. In January (boxed on the chart) new highs were expanding at a decent clip, even with the market near its lows. Now look at the number of stocks making new highs since the mid-March lows. It's a steady erosion, not a steady climb.
The market has been a "chopfest" for quite some time, but the real issue is the deterioration in momentum and breadth. What that says to me is that unless we get a washout in stocks, we simply cannot go up in a healthy manner.
At the time of publication, Meisler had no positions in the stocks mentioned.