As the Market Ticks Into Short-Term Oversold, What's Next?
What's next for stocks? Read on for our forecast.
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My mentor in this business used to say that corrections are the market’s way of changing leadership. That makes a lot of sense when you think about it. The market has a correction and what emerges after the correction tends to be new leadership.
In our current market, we have a change in leadership but the correction is only in the stocks that have led. In other words, we can’t seem to get them to all come down together or go up together. One group goes down while the other goes up or holds on. I maintain that a healthy market is not one where the major indexes go down and breadth rises or vice versa. It should be that we can all co-exist in one market.
Take a look at the chart of breadth (blue line) with the S&P (brown). The S&P has corrected four percent while breadth has hung in there. Generally speaking, that is good news but not when so many of the index movers are gapping down.
In any event, you can see the NYSE Overbought/Oversold Oscillator dipped just under the zero line, making it marginally oversold. Nasdaq’s has fallen much more and is deeper into a short oversold condition.
Can the Fed save us? I don’t know since I am not a Fed watcher but I do know that the 30-day moving average of the advance/decline line has finally pushed up to an overbought condition. The math says even if it has a few more days to the upside, it’s unlikely to last very long.
The Volume Indicator has clawed its way back to 54%. As I have noted, it gets overbought in the mid to upper 50s so it’s essentially there now as well.
So, we have a short-term oversold condition and a soon-to-be intermediate-term overbought condition. That leads me to believe we should see one more rally and that this rally is unlikely to last.
In the last week we have seen folks delve much more into buying puts as the put/call ratio has begun to rise. Notice how the ten day moving average of this metric has gone from .83 a week or so ago to .93. That’s big rise. So at least we know the giddiness has eased from the market.
If we can get a short term rally (will the Fed accommodate?) and get the ‘rate cut’ folks excited then I think that would be our short term oversold rally that we want to sell into.
