235 New Lows vs 120 New Highs Is the Real Story

Selling momentum was strong at midday on Tuesday when dip buyers showed up and turned the tables. They were able to run things back up and push the S&P 500 above the opening level, but it still finished with a small loss. S&P 500 breadth was slightly positive while overall market breadth was only around 40% positive.

The most notable stat was about 120 new 12-month highs against 235 new 12-month lows. That is remarkable for a market where the major indices are extended and hovering at all-time highs. Typically, when the indices are at the highs, the ratio of new highs to new lows is far better than two-to-one positive. I don't have the data, but the inverse is so rare that it may have never happened to this extent.

This issue of bubble action on one hand and poor breadth on the other is tough to navigate. As I've been discussing, the great likelihood is that it will trigger strong rotational action rather than a broad selloff, which would be bullish.

Rotation Beats the Broad Selloff

The bears gave the broad selloff approach a try on Tuesday, but it morphed into rotational action to some extent once the dip buyers showed up. Not everything recovered, but there was better recovery in non-tech names like retail and pharmaceuticals. The iShares Biotechnology ETF (IBB) did particularly well, bouncing 1.3%, which illustrates there is still plenty of appetite for risk.

The good news is that the action suggests a shift toward stock pickers who aren't interested in chasing bubbles or super-momentum. Some of this is just short-term traders playing volatility, but it is also likely that we have some whales out there looking for "value" in a market that has become expensive because of the run-up in technology.

My Game Plan

My clients' cash levels are high now at around 50%, and that has a substantial impact on the way I view this market. I'm not worried at all about more downside. I'm rooting for it, because there are many stocks I'd like to buy at a lower price. I expect we will see more churning and basing, and I don't expect strong immediate momentum. I do think seasonality will be a factor, and if we hear some good news on Iran, I still think there is likely to be some sell-the-news pressure. I'll be doing a lot of digging for new ideas for idle cash, and I'll keep you posted.

Have a good evening. I'll see you on Wednesday.

At the time of publication, DePorre had no positions in any securities mentioned.