Oversold, But Can the Others Play Catch-Up?
We’re back to the highs, but the rally has not brought many stocks along for the ride. Let’s look back to see what the future might bring.
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Statistically speaking, this has got to be one of the worst rallies we’ve seen. However, it is also one of the more expected ones. Sometimes it helps to have a bit of a review.
In 2025, about a year ago, we saw the Tech/Semis rally peak in October. The entire market had a decent correction into Thanksgiving, and then we had a terrific lift—a year-end rally. But you know what lagged in that year-end rally? Tech.
The rally was broad—a true broadening out—as new highs expanded, new lows contracted, and breadth soared. We’ve looked at this chart before, but please look at breadth (blue) and that romp it had from the Thanksgiving low, while the S&P, laden with tech stocks, could only eke out a marginal higher high.
Yet no one talked about broadening out because they were so loaded with tech stocks. They mourned their tech stocks, especially as January rolled around and software collapsed in the first two months of the year.
Then we had the spring low, after a decent correction in March. And by decent, I mean the VIX got jumpy, the put/call ratio showed fear, and the bulls jumped right into the bear camp. The semis led that lift, and until mid-May, breadth was pretty good—things were in sync.
Tech peaked in early June, and money was able to flow into the others. The others rose, but not like they did at year end 2025. But with the SOX collapsing in July, it gave way to the broadening out narrative. The SOX really did have a clearing event (remember that phrase?) in late July, and it has held up remarkably well since then. In fact, it feels as if the SOX has been leading this rally. At least it feels that way to me. The SOX has had exactly three red days in the month of September.
Now take a look at the SOX relative to Nasdaq. That is not leading. The ratio is nowhere near a new high, yet Nasdaq has gotten to a new high.
I still lean positive on the SOX, although, unlike most of the last two months, my camp is getting a wee bit crowded. But I am going to watch this ratio because, despite the prevailing narrative, the SOX is not the leader.
And take a glance back at that breadth chart. That is quite a divergence. Perhaps you can see it better expressed in the ratio of RSP to the S&P (SPY). The ratio has collapsed—that’s the others having come down as soon as the SOX made a low in late July.
I think we are still oversold. I keep thinking the others should play a little catch-up and rally. For four days, that has not been the case. For four days, that view has been wrong. The one thing bulls do not want is a market that uses up the oversold condition without rallying more than a handful of stocks. And bulls certainly do not want that while sentiment is quickly pushing back to bullish.
