It was another sloppy day where breadth leaked, new lows expanded and sentiment remained elevated. It was also another day of chop.
On the sentiment front, we saw a Bank of America/Merrill Lynch survey report that fund managers’ cash levels had fallen. The headline was that they are the lowest since June 2013. If you look at the chart you’d see we had just completed the “Taper Tantrum” – the market correction when then-Fed Chair Ben Bernanke said they might pare back on quantitative easing. The market rallied the remainder of the year. So the bulls think this is fine – it’s a good omen.
I don’t use this indicator, but I do know that fund managers using their cash tells me their sentiment has shifted. If they hadn’t changed their views on the market, then they would not have put money to work. What struck me was how many people told me that I needed to ignore this sentiment tell. It didn’t matter. My take is that if you were bullish two months ago because cash levels were over 5%, then you can’t rationalize it when those levels have moved down.
Then we have the Investor’s Intelligence bulls. They were 57.6%, so they have barely budged from last week. So, sure, they are elevated, but they are not over 60% yet. We have not seen over 60% since early October 2018, but we have seen over 55% lead to a correction three other times this year.
But the real issue is not sentiment alone. It is that breadth has been red for five of the last six days. The good news is that another few days of negative breadth and we’ll finally get the market back to an oversold condition. The bad news is that after leading the market for a few months, breadth has started to diverge. And when breadth diverges, problems tend to arise.
Another issue is that the number of stocks making new lows on Nasdaq continues to rise. Tuesday there were 107. But now the New York Stock Exchange has joined in. We saw 71 new lows there. Strong markets do not see new lows expand to levels like these with stocks at all-time highs. The 10-day moving average of both the NYSE and Nasdaq are now rising.
And finally, the McClellan Summation Index, which tells us what the direction of the majority of stocks is, rolled over a week ago, and has shown no sign of recapturing that uptrend. It would now require a net differential of positive 1,200 advancers minus decliners to halt the decline. The chart is shown below.
For the most part, we’ve seen leakage, but no real selling. If we get some selling, I suspect sentiment will turn panicky quickly.
Take a look at the chart of iShares MSCI Emerging Markets Index (EEM) - Get Free Report, an exchange- traded fund for emerging markets. I was quite fond of this chart back in August, but the last week has not been kind to it. Notice the blue boxes saw a similar pattern. The key was the re-rally. In both hose examples it failed to make a higher high on the re-rally after the initial decline. Now look at the green box. There were three times the pattern looked similar. Each time the re-rally went to a higher high. So this should be watched closely. A failure to make a higher high on a re-rally would be negative.
The chart for the McClellan Summation Index is below:
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Microchip Technology (MCHP:Nasdaq) left an island overhead when it reported earnings last week. It hasn’t, however, broken down yet. The green line is just breaking now. I would say it likely makes its way down to the blue line.
Every measured target I can come up with on Allergan (AGN) - Get Free Report comes in around $180-$190. So while the stock hasn’t done anything wrong, it has hit its target. Taking some profits is not a bad idea. If you want to hang on, then I would use a trailing stop, but that seems far away, under around $170.
I was asked to look at the ratio of the Energy Select Sector SPDR (XLE) - Get Free Report to the Consumer Staples Select Sector SPDR (XLP) - Get Free Report. That’s oil and energy as it relates to staples. It hasn’t made a higher high, but it also did not make a lower low in October and the latter is worth noting, because that’s the first step in changing the trend that has been in place for 18 months. A move up and over the blue line is the next step, especially if it can get over 1.05. Right now, my inclination is to wait for the crossing over the blue line. If I heard universal hate for energy – as we did for banks in October – then I’d think this could easily go up, but I do not hear that chatter. Not yet at least.