The Market
There has not been a lot of change in the market since Monday, but there are some small, minor negative divergences. Thus far they remain minor. And yes, I still expect we'll see some short-term volatility.
Let me start with the ratio of the Russell 2000 ETF (IWM) to the PowerShares QQQ (QQQ:Nasdaq). The Russell 2000 has been red (barely) for four of the last six trading days. Nasdaq has not, so the ratio has fallen. And recall that in the past when the ratio heads down, volatility tends to pick up.
It matters because, as I noted in Monday morning's Letter, by the time mid-July came around, this ratio was halfway down the page; you can see that all the indexes remain at the highs but the ratio is lower than it was a few days ago.
As for the minor negative divergences, the number of stocks making new highs has not increased at all this week despite the new highs in the S&P 500 and Nasdaq. But more than that, the number of stocks making new lows on Nasdaq (not the NYSE) has ticked up modestly, something we haven't seen in almost a month. Again, notice that is what happened in mid-July.
On the sentiment front, the Investors Intelligence bulls finally scooted over 60%. Typically, a move over 60% means upside is limited and downside is likely. But more than that, the ratio of bulls to bears has ticked over 4. You can see there were a series of these readings over 4 in 2014 and 2015.
Not shown on the chart below is the reading from the last week of December 2013; when the calendar turned to 2014 we slid and slid hard. The chart below of 2014 shows the three readings we had that year over 4. The takeaway is that in all three cases it took a few weeks for the market to care, but care it did as you can see.
In 2015, there were two such readings. The first one was almost immediate in that it took a week before the market corrected. In late April, it corrected and made a new high in short order, but I have only shown the S&P 500 through June; in August that year we saw the market down 10% in a matter of a few days.
We already know the Fear and Greed Index got over 95, which is too high. We know the S&P 500 Daily Sentiment Index got over 80 last week (currently 86) and now Nasdaq has finally joined the S&P 500 with a reading at 80.
The main positive is that breadth has not rolled over or gone negative. If it had, I would turn cautious. For now I would say it's just probably not a good time to add to new longs unless you are willing to use a tight stop. If breadth rolls over, I will turn more cautious in the near term.
New Ideas
I have been relatively lukewarm on Johnson & Johnson (JNJ) , but since I get asked about it often, I thought I needed to address today's move. The most bullish thing would be if it stays over $135, but quite frankly over $134 is OK, too. It measures to $140.
To follow up on my favorite name in the Consumer Staples Select Sector Fund (XLP) , Colgate (CL) caught an upgrade today, and while I'm shocked that an upgrade could gap the stock higher on big volume, I would note the target is still in that $75-$76 area.
Today's Indicator
Since I am working away from my desk today, I will refrain from showing today's indicator but will resume tomorrow.
Q&A
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I always have a hard time with charts that have huge gaps up and down. Technically speaking, Splunk (SPLK:Nasdaq) left a huge island down below when it gapped up in August, which should be very bullish, yet here we are with the stock right back to where it started when it gapped up (islands should give way to "nothing but up"). My guess is it's short-term oversold enough to bounce, but my bet would be that it makes a trip to fill that gap near $60-$61 where it would probably be a buy for a trade.
We looked at Intel (INTC:Nasdaq) a month or so ago with a positive eye. That base measures to $40-$41. Typically, we should see a small pullback and another try into the target zone. I would look to take some profits in that zone.
Johnson Controls (JCI) has two patterns at work. The black line is the start of resistance. The red line is the neckline of a head-and-shoulders bottom that measures to fill that gap near $43. I would say as long as the stock stays over the red line, it gets a chance to meet the target near $43.
