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Caught in the Market Mix

The indicators still have yet to say whether things are turning bearish of bullish, but keep an eye on the volatility index – the put/call ratio for the VIX was under 20% for two consecutive days, and if we get another reading under 20%, it would start to raise red flags.

The Market

Everyone is waiting for me to say the indicators have turned bearish or bullish, but I can only report they remain mixed.

The bullish side of the ledger continues to be breadth. Breadth slowed this past week with Thursday red and Friday lagging. I think that’s the short-term overbought situation at work. But so far, it has not been weak enough to turn or even weaken the McClellan Summation Index. And it’s the Summation Index that tells us what the majority of stocks are doing: In this case, they’re going up.

To counter these bullish indicators, the number of stocks making new highs has begun to falter. The number of stocks making new highs during Friday’s run to the old highs in the S&P 500 chimes in at 130 for the New York Stock Exchange and 111 for Nasdaq. Just to put that in perspective, earlier last week the NYSE had 177 new highs and Nasdaq had 116. I won’t even mention the number of new highs we had in mid-September, but you can view the charts below.

As far as sentiment goes, it’s not giddy, but it’s certainly a bit more bullish than it was a few weeks ago. That is evident by looking at the 10-day moving average of the put/call ratio, and where it has come from and is now.

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But keep an eye on the Volatility Index: This past week the put/call ratio for the VIX was under 20% for two consecutive days. There were times it was bearish and times it was bullish. But if we should get another reading under 20%, it would start to raise red flags. That’s because then it’s become too persistent, the way it did in late July. When someone is that persistent in their view that the VIX will rise, we need to pay close attention.

In addition, the VIX is mapping out as I drew in earlier last week: up then down. It is now approaching 12, which has essentially been the lowest reading we’ve seen in a couple of years. I’m focused on the Daily Sentiment Index (DSI) for the VIX because it is now at 17, the lowest reading since it was 15 on July 3. Notice how the VIX bounced in early July, but the S&P didn’t have more than a day or two of pullback. It was when it retreated back toward 12 in late July – coupled with all those low put/call ratio readings for the VIX – that we had to look for a move up in volatility. Right now, I’d say I’m more inclined to look for a VIX move like early July, but that will change if the indicators change.

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Let me finish with volume. The Volume Indicator, which is the 30-day moving average of up volume as a percentage of total volume, is now at 48%. This is quite surprising, because it’s not an expression of total volume, but rather how much of the volume is on the upside relative to total volume. Why is it falling when breadth is rising? Part of me wants to ignore it, because if it gets down another percentage point or two, it becomes oversold. Yet the other part of me wonders if it is telling us something bearish is around the corner. Can you see why I say the indicators are mixed?

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I have seen a lot of chatter on the lack of total volume during this current rally. This is true, but low volume rallies have been the hallmark of the market for decades. Think about it: We get panic on sell offs, and folks are more apt to sell in panic, thus we get higher volume on declines. Buying tends to be more stair step, so volume tends to be lighter on rallies.

If we look at the 20-day moving average of NYSE volume, we can see that peaks in volume tend to coordinate with lows in stocks. Troughs in volume tend to coordinate with highs in stocks. With the 20- day moving average of volume now on the low side, I would begin to fret if volume started to rise, because once it starts to rise, the rally tends to be near its end.

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New Ideas

I am intrigued by Alcoa (AA) - Get Free Report, because the company missed on earnings and the stock didn’t go down. It didn’t exactly scream upward, either, but if it can get up and over the top line of around $22, perhaps it finds some new buyers.

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Valero (VLO) - Get Free Report has been a big winner for us, but it is kissing resistance now, and has managed to complete the 90/100 rule (90% of the stocks that make it to $90 will make it to $100). Longer term, it measures back near those old highs, but near term it needs a rest or a correction. I would sell some.

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Today’s Indicator

I separated out the common stocks-only new highs, so you can see that we cannot blame the fall off in new highs on the decline in bonds.

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Q&A/Reader’s Feedback

Helene welcomes your questions about Top Stocks and her charting strategy and techniques. Please send an email directly to Helene with your questions. However, please remember that TheStreet.com Top Stocks is not intended to provide personalized investment advice. Email Helene here.

Raytheon (RTN) - Get Free Report hasn’t done a thing wrong. The worst I can say about it is that it is nearing a measured target around $215, which means it probably needs a rest or pullback. You might want to take a look at a stock like United Technologies (UTX) - Get Free Report into a pullback to test the breakout of $137-$140, since it has only just broken out and seems “earlier” than RTN.

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I had liked Chipotle Mexican Grill (CMG) - Get Free Report last summer when it was around $700, and I had a target in the $800 area. I hope you can see how some of these targets work. Sometimes they get to the area, and even if they keep on going, it’s usually a late push. Sometimes they go down. Sometimes they just go sideways, but rarely is a stock a great buy at that price.

In the case of CMG, I’d say it looks like a top is forming to me. It’s probably a bit oversold, since it’s been three days since the gap down on earnings, but if that area breaks it measures down near $720-$740, so I’m more inclined to sell rallies near $820 in CMG, or wait until a buying setup presents itself again.

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I am not a fan of playing earnings, as I think it’s gambling, but I was asked about Beyond Meat (BYND:Nasdaq), which has earnings early this coming week. It has come down quite a bit, and has filled the gap. If earnings weren’t on the horizon, I would say I think it can rally in the near term, but eventually that top measures near $40.

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We already know I think the oil stocks can rally (using Energy Select Sector SPDR (XLE) - Get Free Report as a vehicle) but what about Schlumberger (SLB) - Get Free Report? It’s a little overbought as you can see — it’s been churning for days — but I do think it ought to make its way toward $38. I will consider myself wrong if it breaks under $34 in a meaningful way.

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