What made Monday’s decline different than any other decline in the last two months is that there was some real selling. Stocks were down, and down a lot. And they were down on volume in many cases.
Considering the S&P 500 was down 27 points, I would say breadth was not terrible at negative 1,325, but the issue is that it had started lagging a month ago and never took the lead again. If we go back to the McClellan Summation Index chart that we looked at a week ago, we can see that rally last week in small caps – and in everything else, but mainly small caps – did not move the needle when it comes to the Summation Index. That’s the same thing that happened in late April.
The good news is that the Summation Index needs a net differential of positive 1,800 advancers minus decliners to halt the decline. Once it gets to positive 2,000, it steps a toe into oversold territory. That means it could get oversold in a hurry.
The number of stocks making new lows increased, but did not soar. That might be because we are now going to drop that December 2018 plunge in all these stocks, so it will be harder for the new 52-week lows to expand. But that is rationalizing an indicator, something I prefer not to do. At least Nasdaq didn’t go back to triple digit new lows on this decline.
Over the last few weeks, I’ve asked you to pay close attention to the chart of the iShares MSCI Emerging Markets Index (EEM) - Get Free Report, noting that a failure to make a higher high on the re-rally (off the correction from early November) would be problematic. It remains problematic. It did not see much selling Tuesday (that’s good), but my guess is it makes its way down toward that line near $42 and then bounces.
In terms of sentiment the DSI for both Nasdaq and the S&P have backed off to 70 – no surprise there. The VIX has gone from single digits to 24. Also no surprise.
I would not be surprised to see the market attempt a rally Tuesday, but I am going to have to see more improvement in the indicators for me to embrace the market again. The last two days were a beginning.
I was asked about McDonald’s (MCD) - Get Free Report a few weeks ago. I am disappointed it took it so long to move up, but it has done so in the last few days. If it cannot get up and over this $197 area in the next few days I’d have to give up on it doing much better than that.
The iShares 20-plus Year Treasury Bond (TLT:Nasdaq) has pulled back from the $141 resistance. At $136-$137 it would touch that downtrend line. I’m watching this closely because the DSI is currently 30, so some more downside could get it back to about $20.
The 30-day moving average of the advance/decline line is still nowhere near oversold.
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Prudential Financial (PRU) - Get Free Report ought to eventually fill that gap above, but note that it didn’t even make a higher high (well it eked one out by like a penny) last week over the early November high. And if it breaks under this uptrend line it will have to go through the process of repairing itself and setting up again. Either way the upside doesn’t seem that big at this moment so if you want to buy then a trade under $92 and it will have to go through a reparation process so you know you are wrong if that happens.
Dillards (DDS) - Get Free Report, which makes me think of the dentist, had a nice gap up and has come back down and is trying to fill the gap/retest that breakout. Somewhere between here, and at $68 it’s probably a buy for another rally.
I am still not ready to endorse AT&T (T) - Get Free Report. I think it had a terrific run, it got everyone very excited, with all sorts of ridiculous higher targets and it broke an uptrend line when it down drafted. Do you see the way it spent six weeks going sideways in September and October? That’s what it would need to do for me to think it is buyable again.