I wish I could tell you I see things differently today than I did a few days ago, but I can't. My view for the last two weeks has been that we are oversold and breadth has improved. And that is beneficial to the market.
I also believe that we never saw the type of panic and bearishness two weeks ago that accompanies a good low in the market. In my view, all we did was see complacency decline. That was enough, coupled with that extreme oversoldness, to get a decent rally in the market.
For this reason we pay attention to several items this week. The last few days of the week last week brought us a flat Russell 2000. As you know, I prefer it when the Russell 2000 is in charge. The ratio has backed off, so I will only be upset if it cannot re-rally. I believe it has another shot at rallying again.
One reason is breadth; it continues to push upward. Another reason -- the main reason -- is because there is still time before we move back to an overbought condition. Oddly enough, that arrives just as the calendar turns to December (i.e. we get overbought on Friday). I have always been a believer that as long as we are not yet overbought and as long as breadth has not faltered, the market gets the chance to right whatever wrongs it has.
So let's look at what needs to get better this coming week. The McClellan Summation Index is rising; that is bullish. But as you know, if breadth falters enough, the Summation Index turns down. Since the Summation Index has barely lifted, a turn down from here would be quite concerning. As of today, it would take a net differential of -1300 advancers minus decliners to halt the current uptrend.
The number of stocks making new highs has contracted in recent days. It never surpassed the early October peaks, so if this week does not bring us an increase in new highs (by the time we get overbought) that is concerning. (chart shown below).
The Transports. I thought by now the IYT would be at $175, and it has not even tagged that downtrend line. If it can't get there by the end of this week, it becomes concerning.
Then there is sentiment. Complacency is rising. We've already discussed the Investors Intelligence Bulls refusing to back off under 60%, but we did see the put/call ratio at 118% on Nov. 10, a handful of days prior to the oversold rally's commencement. We have now seen four of the last five trading days with the equity put/call ratio under 60%, which is nothing extreme -- in fact it helps the 10-day moving average head down, which is bullish -- but shows how quickly folks are embracing the rally.
The last two days have seen the put/call ratio for ETFs under 100%. That is quite concerning to me, because it says sentiment is heading to complacency too fast.
Or is it? The put/call ratio for the VIX sank to 11% on Friday. That's quite an extreme, because it says folks are of the mind that volatility will rise, which generally happens when markets fall. Thus, the contrarian would say, it's bullish.
The bottom line is we are not yet maximum overbought. Until that time, the market has a chance to improve some of the laggards.
It's time to revisit Citibank (C) - Get Free Report. When we looked at it in early November, I said I wanted it to come down to $70, where I expected it to bounce off that line. The Bank Index has formed the head-and-shoulders top I have drawn in. I am hopeful many will see it and turn sour on the banks. I am also hopeful that Citi comes down for a retest of $70. Because if it gets down there ($70-$71) I'd be interested in buying it, because then the stop is so close at under $70.
The new highs are discussed above.
Cracker Barrell (CBRL:Nasdaq) got right to resistance and then collapsed. I am quite surprised at such a collapse so quickly from this resistance. It does have support down here and should bounce. I would be inclined to sell it at $152-$154.
If Hawaiian Holdings (HA:Nasdaq) can map out as I have drawn in blue, it would make the chart so much better and make me believe that enough work has been done down here to lead to a better run upward. Failure to get over that black line keeps the stock in a downtrend.
I have no idea what to do with the chart of XLE, because it looks to me like it is filling a gap and will now turn back down. Yet it is over that downtrend line, so any move down to the trendline should just be part of the bottoming process. So let's say near the $65-$66 area I'm interested in the chart. Up here, not so much. Up here, I'm more inclined to take profits/sell and wait.