Unless the SOX Can Get Off the Floor, There Will Be Trouble

The penny stock speculators haven’t eased up, but they are not nearly as aggressive as they were. Today’s big mover is Lytus Technology which traded just under a billion shares today. The price? Oh, it closed at twelve cents, up six cents on the day. I guess these folks just can’t stay away!

Today let’s revisit the SOX since it is now closing in on those lows I highlighted yesterday. However, today let’s look at the ratio of the SOX to the Nasdaq Composite. The chart below has the ratio in the top panel and the SOX in the lower panel. Notice that the lows in the blue and green boxes led to rallies. Now notice that the rally from the blue box was significantly better than the green ones.

I believe that is because the green ones came from lower lows. You might have to squint a bit, but all three lows on the SOX were the same area (4250), but the first time we shrug because, well, it’s the first time. The second time, the bounce isn’t so great. And the third time the bounce is even more lethargic.

Now, look at the red box. The December low is barely visible on the chart of the SOX. The same can be said for the next two. Now we find ourselves pushing the ratio to a lower low.

So, as the SOX is getting closer to 4250, its performance relative to Nasdaq has gotten worse. If this breaks to a lower low (the ratio), we can expect an oversold bounce (more on that below), but as you can see each rally in the SOX has less zip than the one prior.

Unless/until the ratio starts making higher lows, that looks like what we should expect.

So, should we expect another oversold rally? For the next few days, the Oscillator will drop some big positive numbers. If the market pulls back due to that overbought-ness and we get some panic—still a missing ingredient—then we should expect another oversold rally in early April.

Speaking of panic. It has been my contention that we haven’t had any, and all we’ve had is persistence in selling. This week’s National Association of Active Investment Managers (NAAIM) shows another week of reduced exposure to the market.

Three weeks ago, when we got oversold, these folks still had their exposure to the market just under 70. It now resides at 54. Typically, as the market rallies, they increase their exposure, not reduce it. But this time, the lack of panic has shown up in the form of persistent, not panicky, selling.

This mid-50s level has been the lowest they have let their exposure go in the last fifteen months. I would consider any solid drop below this area to go to push the indicator to the bullish side of the ledger. It would be better if they panicked, though.