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Disconnects Abound

The best thing this market can do now is come back down during the middle of this week.

Special Note: Helene Meisler is taking a couple days off so there will be no newsletter this evening or on Tuesday, Sept. 30. The regular newsletter schedule will resume on Wednesday, Oct. 1.

The Market

Friday was interesting because the market actually gave you a chance to play the oversold rally after the open. How many times have we seen the market simply gap up when we have seen such an oversold setup and it doesn’t let you play? This time it let you play.

What you should like about Friday’s action is that the market is still oversold. But more than that is the fact that the put/call ratios were incredibly high for the second day in a row. The put/call ratio for the ETFs was even higher than it was on Thursday (250% Friday vs. 232% Thursday). The total put/call ratio stayed high at 113%. And then there was the Market Volatility Index’s (VIX) put/call ratio, which sunk back below 20% (again, this is a sign that folks are betting on a higher VIX, lower market).

For the first time in at least two years, the low VIX put/call ratio did not work last week, having had a reading of 11% on Friday, Sept. 19. That was a change last week, unless, of course, we count Wednesday and Friday’s rallies. I’ll put this in the category that they got it right; it was not contrarian for the week.

Then there is the iShares iBoxx High Yield Corporate Bond Fund (HYG), that I have been harping about for weeks now. It did not confirm the rally Friday. There is a “but” to this though. Notice the action on Friday, as it plunged to the August low and reversed to close almost unchanged. If there is any follow-through on the upside, that would support an oversold rally. I had thought it would bounce off that $91.75-$92-ish area, but I was wrong. It plunged to $91 before reversing. If it cannot keep this reversal going, then, clearly, the oversold rally is in jeopardy.

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The reality is there are so many disconnects in the market right now. The question I get asked most often is about how all these indicators can be so oversold and sentiment can have gotten so bearish even though the S&P 500 mere points off its all-time highs. I have said time and again, I can come up with only one reason: the flood of money into index funds has caused this distortion. If we understand that individual stocks do not match the indices, then we can understand why the indicators look as though they do. In the market of 10 years ago that would have eventually brought the S&P lower; in this market, it stays supported.

Another disconnect is the dollar. The dollar had a heckuva day on Friday and gold barely budged. Lately, a move in the buck (upward) has caused downward spiraling of gold and that did not happen Friday. Speaking of the dollar, the Daily Sentiment Index has moved to 91 on it; that’s a lot of bulls. But what really struck me was how all of a sudden the equity folks seemed to have discovered the dollar during the latter part of last week. In my experience, when equity folks discover something they typically don’t pay much attention to, especially after a big move has occurred, then the market is usually close to a short-term reversal.

Another disconnect is the volume in the PowerShares QQQ (QQQ). You might recall that was one of my reasons for thinking that the market should rally in my Thursday night newsletter. Typically, a spike in volume like that marks a low. Yet Friday’s volume was nearly the same as Thursday’s in the Qs. That is not typical. When folks do not know what to short, they jump on the Qs, which is one reason we see volume spike on these down days. But once an oversold rally ensues, the volume in the Qs dries up. Yet Friday volume in the market was pathetically low and volume in the Qs stayed elevated. I can only conjure up a guess that there was a lot of short covering in the Qs Friday because it surely wasn’t in individual stocks.

The best thing this market can do now is come back down midweek this week. I think if it does then that will set it up for a better rally in October. But I’ll admit those high put/call ratios have me wondering if they can take them down that soon.

One thing that might help the market come back down is that (as I mentioned above) I am taking a few days off this week.

New Ideas

I am going to whittle down my request list a bit today. It’s long, but I love your requests, so please keep them coming! I just don’t want them to back up while I take a few days off.

So, we’ll look at the European ETFs that are on the list, beginning with iShares MSCI Germany (EWG), an ETF to be long Germany’s DAX. When we last checked in on this a few weeks ago it was hovering in the $29 area and I was looking for a retest of the lows. This last week gave us that. Now I look for a rebound (i.e., an oversold rally). My eyes are on the $28.75 area now. If it cannot rally up and over that during this oversold time frame, then we will look for a break of $28 the next time down.

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iShares MSCI Italy Capped (EWI), the ETF to be long Italy’s market, has curiously not fared as poorly as Germany’s even though their news is seemingly worse. It has had a similar pattern of rally and retest but has not gone all the way back to the August lows. If this rally cannot get back above $16, then I would look for another serious decline. If it can get back above $16, I’ll consider this last move down a decent retest.

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Today’s Indicator

The Hi-Lo Indicator for the Nasdaq is back to the levels it has bottomed from before. Each time we have rallied from this point, the rallies have been narrower and narrower. If this indicator cannot get down below 15% (see the 2012 lows on the chart) then I suspect the market will be in the same place it has been: another narrow, oversold rally. Cheer for some more downside later this week to get this below 15%.

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Q&A

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.

Eaton (ETN) still has an unfulfilled target around $61-ish but please notice how little selling there was in the stock this last week, which was a seriously down week in the market. That is a bright side for the stock. Failure to rally above $67 on this oversold rally would set up the decline toward the target down near $61.

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Skyworks Solutions (SWKS) has not done a thing wrong. I can no longer calculate a measured target on this so I would say as long as it stays above that line (which is my expectation for now), the stock should be OK to hold.

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Avago Technologies (AVGO) is not my kind of chart, as support is so far away. There is minor support at $85 and the measured target area of $90 has been met. So as long as it stays above $85, I suppose it is OK to hold. However, a break below $85 would start the process of topping out.

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