In Search of a Short-Term Rally to Bolster a Bearish Call

Let me tell you the things I fret about when it comes to the market. Oh, sure, like anyone else, I fret that whatever setup I have prepared for won’t come to fruition. That is common. Heck, you’d be quite unique if you didn’t fret over that.

But I also fret that whatever scenario I have laid out and, therefore, prepared for, goes from a contrarian call to one that everyone has. In other words, I fret over having too many shift toward my view.

For weeks now, I have said I thought we’d pull back in early December, but then we’d set up for a Christmas rally (likely in the others that had fallen so much in early December), but that come the first quarter, I expected we would see a correction of a bigger magnitude. While that is still my view, in the last few days, it seems that the calls for a correction in the first quarter are growing. When I first started seeing this scenario, I was lonely in that call.

But since then, group after group after group has sagged. The Industrials, the Transports, the Utes, Small Caps, Big Caps, Homeis, Energy—energy has collapsed!, the Financials, the Drugs, Biotech. I could go on, but as you can see, there are many. In fact there are so few that haven’t corrected in the last two or three weeks.

There are so many that the number of stocks making new lows expanded once again. The NYSE now has more stocks making new lows than it had in mid-September when the S&P was nearly thirteen percent lower.

Sure, the Russell 2000 bounced on Monday, but breadth was still negative. And a mere 38% of the volume on the NYSE was on the upside. It was higher on the Nasdaq, though, since, as we know, that’s where all the money is going. In fact, Nasdaq had its highest total volume at 8.9 billion shares since November 13th.

Maybe the anecdotal chatter will eventually translate into statistics, but for now, the put/call ratios are still low, and the ISE call/put ratio is still high. My guess is the surveys see a pullback from all that bullishness we've been seeing.

I always prefer a low that comes with a whoosh in the market. It feels more like a cleanout than the steady drip drip drip that we’ve seen. That’s why I am going to keep my eyes on OIH. Folks piled out of energy on Monday as if we were never going to drive a car with a combustion engine again.

XLE broke the early November low and looks a bit whooshy in that respect. Yet OIH came down to the line and filled that gap. It is hard for me to get too bullish on energy when the Daily Sentiment Index (DSI) on oil is 73, but at least I can watch to see if there is a trade in it.

As for the market as a whole, if we can get a rally in the others during Christmas week, maybe those calling for a first-quarter decline will change their views and make me feel better!