After last Thursday's action, I noted that I would love the market to come back down for a retest, but I fretted whether this market rarely allowed that. We did go down on Friday, so let's take a minute to explore some possibilities.
First of all, Friday saw breadth positive while the indexes were negative. That's a plus. You can't scoff at that. Friday saw the small-caps far outpace the large caps. We no longer need to squint to see this chart turn up. I think we see fits and starts in this ratio, but my assumption continues to be that it works its way higher. I think $150 on the iShares Russell 2000 ETF (IWM) - Get Free Report -- 1500 on the Russell 2000 -- is going to be resistance.
Friday saw fewer than 30 stocks make new lows on the NYSE. Wednesday, you might recall, saw 150 new lows. Wednesday's intraday low was 2557 on the S&P 500, which is 20 points below where we closed on Friday, so it is a bit far away. But ask yourself if you think the S&P 500 can possibly see fewer than 150 new lows on a retest of 2557. After Friday's action, I'd say the possibility rises. The point is the indexes fell and new lows did not expand. That's what you want to see if you are bullish.
The McClellan Summation Index for Nasdaq has stopped going down (barely). For the NYSE, it still requires a net differential of +500 advancers minus decliners. Again, Friday was only one day, but based on the breadth for Friday and the fact that we are not yet overbought, we'd have to figure that a good breadth day this coming week would improve the chances of halting this indicator's slide, not make it worse.
Sentiment-wise, there are conflicts all over the place, but most of them lean toward the fact that we didn't see much panic last week, just less complacency. For example, the Consensus Inc Bullish percentage bolted up to 77%. That is the highest since early December 2013. As you can see on the chart, early December that year was quite sloppy, as the S&P 500 lost 2%, but late December brought a 5% rally in just over a week. Then came January, which was ugly. So having this indicator show 77% bulls tells us there was no panic in their air and the results going forward tend to be more up and down than just up.
The put/call ratios were quite low on Friday, with the Equity put/call ratio at 56%, the first reading under 60% since Oct. 31. But the put/call ratio for the VIX was under 20%. Typically, a reading under 20% is bullish in the near term, because it means too many are betting on a higher VIX/lower stocks.
My best guess is that those beloved big-cap stocks continue to underperform, and the down and outers get their chance to lift. If we do get a whack early in the week and we see positive divergences (fewer new lows would be a positive divergence) and some fear in the air, then I would think we can rally better.
Let's take a minute to look at a stock that has been a big-cap winner this year, but has sold off since November started. General Dynamics (GD) - Get Free Report has come down quite a bit. I would expect if it gets to $195-ish we'll see a bounce. And yes, I think the bounce might just give us the right shoulder of a head-and-shoulders top. But a bounce from that support is not out of the question.
Or take a stock like Microsoft (MSFT:Nasdaq), which barely participated in Thursday's rally. If we get a whack early in the week, maybe MSFT fills that gap at $79 and gets oversold enough to rally. But I don't think this chart, as it is set up now, is going up well from here.
Yet oil stocks in general look awful and are down and out. What if Halliburton (HAL) - Get Free Report enjoys an oversold rally from this $41-ish area? It might even look like a head-and-shoulders bottom. And you know you're wrong if it cracks $41 with any oomph.
The new lows are discussed above.
I thought Celgene (CELG:Nasdaq) would have another push down after that third gap down in October, but since I think the iShares Nasdaq Biotechnology ETF (IBB:Nasdaq) should rally from this $300-$305 zone and since I also think Gilead (GILD:Nasdaq) should rally (see last Monday's letter), then I suppose Celgene is a down-and-outer that can have a rally for a few weeks. There is resistance (not shown) at $110 and more at $115. I would expect to see some tax loss selling as this heads into the second half of December.
When it comes to the airlines, I still favor United Continental (UAL) - Get Free Report, but it has not been kind to me. The big picture for Southwest Airlines (LUV) - Get Free Report is that of a head-and-shoulders top. Yet in the near term, here we have a down-and-out stock, and that's what I think can have an oversold rally, so if it can get over $55.50, it has a chance at tagging resistance at $57.50-ish.
I have been looking for VanEck Vectors Gold Miners ETF (GDX) - Get Free Report to have one good shakeout, toward $21-ish before it got oversold enough to rally, and it can't seem to break. If it gets back over $23, I will give up on my call for a breakdown. Seasonality for gold gets quite good in December.