Looking for a Bounce, but What Then?
A tough day in the markets saw the leaders catch up to the others. Short-term, the market is oversold. Longer-term, not so much.
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The market has been so divergent for so long that we finally saw some catch-up from the big-cap indexes. I suppose the good news is that when they finally sell their beloved winners, we’re getting late in the decline.
Before I spew out all the statistics from Wednesday’s market whack, let me once again show you the chart of the Utes. Just over a week ago, we looked at this chart with the same lines drawn in. We discussed that 1000 level and if it broke, it would likely complete the broadening top in the Utes. It has.
The textbooks say this should now bounce for a point 7, which would be somewhere in that 1000-1020 area. Overall, it tends to be a bearish pattern and not just for a short-term whack. It should be on an intermediate-term basis.
But to give you some more concrete data from Wednesday’s decline, we had 90% of the volume on the downside. It took almost all day to get there but by the close we got there. That typically means we should get a bounce.
In terms of my own Overbought/Oversold Oscillator, it is now lower than it has been in over a year. The last time it was this low was March of 2023. But take a look at the summer and fall of 2023 since the Oscillator was in this area. We bounced—all three times. But notice that we had to wait until the third trip down (and a higher low in the Oscillator with a lower low in the S&P) before we could end that move down. The period is boxed in red.
The McClellan Summation Index is still heading down and broke under the zero line Wednesday for the first time in more than a year. It will now take a net differential of +5200 advancers minus decliners on the NYSE to halt the decline. Since there are approximately 3000 issues that trade on the NYSE that would mean we’d need at least two extreme upside days to halt the decline. That is extreme and therefore oversold.
Remember the Santa Rally typically starts a few days before Christmas and Christmas is midweek next week. Nasdaq is not oversold like the NYSE is. But did you see the VIX? That’s an eye-opening move for the VIX. It is definitely on its way to jumpy.
I think there was a minor shift in sentiment after Wednesday’s move but so many of the intermediate term indicators were so complacent that one down day is not going to change them. For example we didn’t even see a big jump in puts since the put/call ratio was a mere .85. To put that in perspective, right before the election, the put/call ratio jumped to 1.30 and in August’s whack it got to 1.28.
Finally let me note that the Daily Sentiment Index (DSI) for bonds got to 10. The US Dollar Index is at 87. So we are close to an extreme in both of these.
So yes I am still looking for a rally Christmas week but I still think we will come down again after that. One down day won’t change that sentiment that got so extreme. Heck, that QUBT was up over 50% on Wednesday. Does that sound like anyone panicked out to you?
