Is the Market Just Resting or Building a Top?

There’s an old adage in the market about how tops take time to form while bottoms can form in a day. My mentor in this business used to say that one-third of the stocks will top out before the indexes, one-third will top out with the indexes and one-third will do so after the peak in the indexes.

We never know if it is a top of any consequence until after the fact but I can tell you a few things. The majority of stocks made their highs in December. Or heck, let’s call it one-third. They made a valiant attempt to increase in March but it lasted exactly one day. It is evident in the Hi-Lo Indicator, which made a lower high and has now turned back down. It currently resides at 44%, down from 79%.

I can also tell you that the Nasdaq is trading where it was in late February. So are the QQQs. And the S&P 500? Friday’s close of 5123 is the exact same close we saw on March 6. Mark that down as (at least) five weeks of going nowhere. The bulls will say the market is just resting. The bears will say we’re building a top.

What I know is the S&P is hanging by a thread on that uptrend line. The Nasdaq still hasn’t broken 16,000.

But the Russell is down 6% in the month of April. It is also down on the year. I’m not very good at calling balls and strikes when it comes to bull and bear markets but if the Russell is in a bull market, it’s surely doing a great job of pretending it’s not.

And the Dow? It is now down 5% from the high and up a mere 1% in 2024. I know no one cares about the Dow, but you have to admit in the last few weeks the Russell and the Dow have gone one way while the market-cap weighted S&P and Nasdaq have gone another.

The DJIA has now been red for five straight days — it’s atypical for it to be red every day of the week but that’s what happened last week. It is also red eight of the last nine trading days. On a short-term basis it is oversold, or pretty darn close to it.

It has been quite some time since I have done a "what if" exercise for the Russell Momentum Indicator but I did do it this weekend. What I do is walk the index down — in this case over the next week or so I keep plugging in lower prices (top chart) until it falls by 100 points — and I look for the day that the indicator stops going down or goes up (lower chart). Because that is the definition of short-term oversold, when price goes lower but the momentum does not follow.

The day does not need to be exact but by Tuesday you can see the momentum indicator goes up. If I had to guess, whatever short-term oversold rally we get this week (and I do expect we will get one) will look more like what we saw in August. The reason is that the indicator has made a lower low, same as it did in August.

So why should we even get a rally? Well Friday saw 92% of the volume on the downside. That’s a little panicky. The last two times we saw that are marked on the chart in green.

However the intermediate-term indicators are not oversold. See the Hi-Lo Indicator above. That gets intermediate-term oversold under 20%. The Volume Indicator is at 51%. That gets oversold in the mid-to-upper 40s.

And sentiment? While it was a little panicky on Friday with 92% of the volume on the downside, take a look at the Citi Panic/Euphoria model which was +.41 when I showed it to you a few weeks ago and is now at +.45.

I do expect the other, more sensitive, sentiment indicators to start moving down from their too bullish views when they are released this week, but none are anywhere near the sort of sentiment we typically get at an intermediate-term low. So if I am correct and we do get a short-term rally this week I would then expect it to come back down again as the intermediate-term indicators still need to move to an oversold condition.

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