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It’s Value’s Turn

Let’s look under the hood of the market – and check in on Facebook, Lululemon and others.

The Market

I feel as though there isn’t much new in the market from last week: There is still a downward or correction bias in the market, but at the same time, there is still a short- term oversold condition that means we should rally. Do you realize that the Russell 2000 was up about 2% last week?

In addition, the indicators show some improvement and sentiment has gotten more sour, but nothing has hit an extreme.

For example, the chatter is definitely leaning toward “buy value, not tech.” A few weeks ago, when I kept noting that the statistics for Nasdaq were deteriorating, everyone loved tech. Now that Nasdaq is down just over 10%, it’s almost hard to find someone who thinks tech is a buy now. But no worries, because they like value stocks.

This is a far cry from a few months ago when they were much more cautious on everything. In my experience, when there is caution all over the place, we tend to get better rallies. For example, the 10-day moving average of the equity put/call ratio is finally on the rise. It’s even higher than it was in late June, but in my view at .57, it really isn’t terribly high. During this entire decline, we haven’t even seen the one-day ratio over .70.

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We’ve seen a few days with the ratio over .60, but glance back at May and June and notice how many times this ratio went over .70 and notice we haven’t seen that yet this time. Also, back in late June, my very un-scientific Twitter Poll (asking what direction you think the next 100 points on the S&P will be) showed a spread between bulls and bears at negative 22. This week’s spread is tilted negative but it is negative 9.

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The Investor’s Intelligence Bulls are down to 55% as of last week (from a high of 61.5%) three weeks ago. A reading under 50% would signal that sentiment has seen a significant shift, not a minor one. I don’t expect this week’s readings to fall off that far, perhaps they will chime in around 52%-53%. The reason is that the small caps did so well last week.

I want to make one final point. Many will fuss that the S&P 500 is fractionally under its 50-day moving average. Keep in mind the moving average is still rising. It would not begin to flatten out or roll over until it gets under 3200. A brake in a rising moving average is not as bearish as a break in one that is rolling over, since if it is rolling over, it means people own that instrument at higher prices. If it is still rising, there is still a majority who own it lower.

Right now, it’s Nasdaq that runs the risk of seeing its 50-day moving average rolling over. Unless it can rally a lot and fast.

New Ideas

To the person who inquired about Lululemon (LULU:Nasdaq) a few weeks ago after it gapped down and I was not a fan, I would note that it has come down to support and filled the late June gap. It should have a bounce attempt from here. I am still not a fan of the chart but if it doesn’t rally from here and instead gaps down under this level it’s not good.

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I am no fan of Facebook (FB:Nasdaq) as it sits on the precipice of this gap from late July. However should the stock fill the gap I’d look for a short-term bounce (around $235).

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Also as a follow up, Lumentum Holdings (LITE:Nasdaq) might be trying to make a stand here. If it can hold this 69-ish area we might finally get a decent bounce.

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Today’s Indicator

The new lows have not expanded on Nasdaq in two weeks. That’s a short-term positive. The Hi-Lo Indicator is currently at 60%. I’d love to see it get under 20% in the next few weeks, because that would make it oversold.

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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.

Sherwin Williams (SHW) - Get Free Report hasn’t done anything wrong. It is over-extended and should try and fill that gap near $675, which would also tag the line. I would start to fret if it broke the lows from a few weeks ago.

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If I had to map out how Limelight Networks (LLNW:Nasdaq) might play out, it would be in blue. Use the blue lines as a guide to the pattern not the exact price. Take a look at late June when a similar pattern mapped out on the chart (green arrow)

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Teladoc Health (TDOC) - Get Free Report continues to intrigue me with the thought that these last few months could be a big correction. Crossing that downtrend line would give me much more confidence (over $210). I don’t think it is clear sailing, if it does that, but it would tell us that the correction could be ending. Under that flat line at $180 I would be dead wrong.

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I don’t love Alexion Pharmaceuticals (ALXN:Nasdaq), because it has so many spikes and give backs, but at the same time I like that it tagged $120 and has thus far only backed off minimally. A stop is too far away (under $105-ish) so I’m inclined to lean positive on it considering biotechs in general are doing better.

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SPDR S&P Homebuilders fund (XHB) - Get Free Report, an exchange-traded fund for homebuilders has been terrific. But who doesn’t know the housing market is on fire? The chart has failed to get up and over $55. I suspect it tags that uptrend line at the very least and possibly even tags that $50 level which was the low a few weeks ago.

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