We Have Yet to Reach the September of Your Fears
Another great rotation was in action Tuesday, this time to recession stocks. But if you're looking for a lasting rally, rather than a bounce, the fear is not enough.
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Tuesday brought us another great rotation, or at least a continuation of one. This time folks did not fuss nearly as much as they did in July.
In July the rotation was out of mega-cap tech and into small-cap anything. After the early August whack in the market the mega-caps had a nice rally and then they stalled.
Tuesday was led by mega-caps but not only mega-caps. Tuesday saw a continuation of a rotation into what I would call the recession stocks: Staples, Utes, Drugs. They say corrections are the market’s way of changing leadership.
I said I was going to focus on the QQQs to see if they could bounce (spoiler alert: they could not and in fact led the way on the downside) to see if the rotation was for real. I am still not convinced, but I can say that folks dumped them on Monday like they had cooties.
The NYSE Oscillator is not oversold.
The Nasdaq Oscillator is a little bit oversold.
The 30-day moving average of the advance/decline line is not oversold either; it remains overbought. The McClellan Summation Index stopped going up on Tuesday. It will require a net differential of +600 advancers minus decliners to get it heading up again.
Then there are the new lows. They expanded at quite a clip on Tuesday. But now we have something to compare: Should the Nasdaq Composite revisit those early August lows and there are fewer stocks making new lows than we had then (around 600) we would have a positive divergence. But that is still far away for now.
Then we have sentiment. You would think folks would jump on the bandwagon to be bearish as they did in early August, but they did not. Friday’s put/call ratio of 0.73 was quite low but Friday was an up day. Tuesday’s put/call ratio was 0.79. For a day where the S&P 500 fell 2% that is quite low, showing no fear. In early August that ratio reached 1.28.
Only 77% of the volume was on the downside so there was no panic selling that we saw. The volume for the QQQs was around 45 million shares, also showing no panic. In early August 92% of the volume was on the downside and the QQQ volume was just over 80 million shares, the highest of the year.
Just prior to my vacation I noted that the American Association of Individual Investors (AAII) bulls had topped 50% and that we typically had a pullback after such a reading, or at least the last four times we had, so let’s consider this a way to reset sentiment once again.
The S&P stopped right at its 50-day moving average and there is a gap around 5455 that all eyes will be on. I do think we can see a bounce on Wednesday but I don’t think the S&P is oversold enough to rally more than a day or so. And as of now there is not enough fear of "September."
