Bad Breadth, Weak Sentiment, but Let's Enjoy the Rally While We've Got It
Right on cue, we're seeing an oversold rally. But it's highly concentrated in one group of stocks.
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Is it just an oversold rally? Probably. But that doesn’t mean we can’t enjoy it for now.
The first thing you will notice is that the Overbought/Oversold Oscillators moved. Recall they were set to get oversold mid to late this week. I know you still have to squint to see the upturn on the NYSE Oscillator but that’s because of breadth on the NYSE (more on that later).
However, the S&P did not quite break last Friday’s low; it came down and tagged it. Last Friday saw 98 stocks make new lows. Wednesday had 99. So sure, there were more but in the ‘in between’ days we saw 117 new lows on Tuesday. That means we had a little positive divergence (very minor) on Wednesday.
Nasdaq did not come close to Friday’s low but the Russell 2000 did break it. Last Friday saw 230 new lows while Wednesday saw 143 new lows. Another minor positive divergence.
But let’s look at the QQQs because you can see the uptick in volume. It’s not extreme and I’ll be honest I don’t know if that came during the morning downdraft but what I see is an uptick in volume and to me that is good news, or at least better news.
I have been advocating QQQs and Semis (SOX) this week because I felt the disdain got too much for this oversold group. I also think that every time folks feel as if we’ve moved on from these index movers, they always seem to re-emerge, like Carrie’s hand emerging from the grave. One day I’ll be wrong to believe that but so far it has worked.
The resistance is 470-475 for now.
The SOX should run into some resistance in that 5000-5050 area.
The Russell 2000 has been pretty pathetic since we reached an overbought reading in late August, having fallen seven percent by midmorning on Wednesday. But look at the bounce off the line that has been in place since April. I wouldn’t argue against IWM IWM playing a bit of catch up especially since breadth has been lagging all week.
And breadth has been terrible. I complained about it on Monday when the S&P was up 62 and net breadth was +870. Well on Wednesday net breadth was +400 with the S&P up 58.
Finally, there is sentiment. It was sounding pretty gloomy and the put/call ratio had risen over 1.0 for two straight days. We’ll monitor how fast folks turn bullish this time but in the meantime, the Investors Intelligence bulls fell nine points to 43.5%. That is actually a point lower than they were in August when they were 44.6%. The bears have barely budged, though; they sit at 22.6%
Wednesday’s put/call ratio was already down to .86 so the fear fell away pretty quickly.
