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Missing Those Sweet September Days

How I would like the market to feel like it did two months ago, when the small caps were leading, many stocks were ripe for picking, the banks were setting up for a run and more stocks were making new highs, rather than lows.

The Market

Here’s what I want: I want the market to feel like it felt in early September. I realize that was more than two months ago, so let me refresh your memory.

Breadth was strong. The market was oversold, on both a short- and intermediate-term basis. The McClellan Summation Index curled under and headed up. There was fear everywhere in the market. Just look at the 10-day moving average of the put/call ratio chart down below. The 10-day average was 110%! It is now 84%. Back in September the small caps were leading. There were stocks that went up, there were so many to choose from. They had life in them. The banks were setting up for a run. The number of stocks making new highs was expanding daily. The number of stocks making new lows were single digits, not triple digits.

And let’s not forget the news. The Institute for Supply Management’s manufacturing number was weak. There was so much chatter about an inverted-yield curve and a recession. The looming October deadline for tariffs was on the table, so everyone was nervous.

Then there was the Fed. Would Fed Chair Jerome Powell say he was done easing? There were fears of the fallout from the REPO – repurchase agreement – market. And earnings. Oh, the fear of the upcoming earnings season was loud.

In other words, the news told us there were few reasons to love the market, but the statistics and indicators told a different story. The indicators said the market was looking past all of that news and believing things would get better, or at least not be as bad.

Now we have breadth weakening, a market that has lost upside momentum. The Summation Index is rolling over. The small caps are lagging. Banks are lagging this week. New highs are falling off. New lows are picking up – Nasdaq had 120 new lows again Thursday. Now we have many earnings behind us and OK, they weren’t so bad. Everyone says this is the trough, so they will get better next year – talk about a change in expectations. We have an ISM that wasn’t as awful as September’s (at least October’s wasn’t). We still have December’s tariffs on the table, but the market seemingly believes they will be removed, or at least not increased.

We have the Fed pausing. But more so, the Fed has taken care of the REPO market by doing what it calls “not quantitative easing.” Call it what you want, QE or not, but it’s buying and it wasn’t doing so before.

I remain convinced that if we can get a few down days, we will see sentiment go from complacent to scared in a hurry. We will see weak hands shaken. And when weak hands get shaken, the market has a better set up. All I know is churning keeps complacency alive.

The DSI for both the S&P and Nasdaq are at 84. The Volatility Index is at 14. A strong up day Friday would probably get the S&P and Nasdaq very near, or over, 90 and the VIX under 10. That could set us up for a pullback next week.

Finally, I did a two minute video with TheStreet’s Katherine Ross yesterday if you’d like to watch it here.

New Ideas

I was asked if the chart of Clorox (CLX) - Get Free Report is a top or a bottom, so I thought it would be instructive to go over the chart. As long as it holds that $145-area level, it’s more of a base than a top. But take a look at the month of October closely. There is a spike low early in the month and a spike high late in the month. For now those are keeping either side in check. Gun to my head, I would have to say it has a rally attempt in the next few weeks. But if that rally cannot get over that spike high, then the stock is in trouble the next time it takes a trip down. So let’s say I am right and the stock rallies, but can’t get over $150 and then it turns down. Then, I think the next turn down has a higher chance of breaking the lows.

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We looked at the iShares MSCI Emerging Markets fund (EEM) - Get Free Report the other evening, noting that when it does rally again, we need to pay close attention. It’s getting oversold down here, but if it got to $42, I’d look for a tradeable bounce.

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Today’s Indicator

The chart for the 10-day moving average of the put/call ratio is below:

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Q&A/Reader’s Feedback

The downside measured target for Expedia (EXPE:Nasdaq) is right around here. We take the high of the pattern (around $140) and subtract the low (around $110) and get $30. Then we subtract $30 from the breakdown of around $123 (where the line came in at the break) and we get $93. The low of the day was around $94, so I’d say this is the area it should start to make a stand and a first attempt at holding and rallying. I’d cover my short if it were me.

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Cisco (CSCO:Nasdaq) is a stock I have not liked for quite some time, and yet get asked about it all the time. That first breakdown measured to $46-$47. The recent one measures near $42. So unless CSCO can turn around and recapture $46 in a hurry, I would look for an eventual low in the low $40s. Perhaps by that point there will be a lot of hate for it, and we can finally like it again.

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The iShares 20-plus Year Treasury Bond fund (TLT:Nasdaq) is knocking up against first resistance, so I suspect this $138-$140 area halts the current rally. But I have drawn in blue how this might play out. I think it’s too soon to tell if it will play out like this, but if it does, then it will not be good for banks over the intermediate term.

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