I feel as though am going to be Debbie Downer, because today’s action was really crummy. Yet the indexes, save for the Russell 2000, do not go down.
Let me begin with breadth. It really is lagging. The best news regarding any breadth indicator I have is that the McClellan Summation Index now needs a net differential of positive 2,200 advancers minus decliners to halt the decline, and that makes it a little bit oversold.
Look at the number of stocks making new lows on Nasdaq. It’s not outrageous, but it is growing, and doing so when the index makes new highs almost daily. What’s more is the 10- day moving average of new lows continues to climb as it has since mid-June.
Sentiment is what is so curious to me. Remember six to eight weeks ago when breadth was so good and everyone was waxing poetic about breadth? New bull market, they said. I heard all sorts of reasoning that we were in a new bull market, because value stocks were leading and that is what happens as we come off bottoms. Well, as we know, breadth began to leak in early June. It has had some good days, but overall breadth has been leaking for five or six weeks now, with the average stock down in that time.
But back when the banks were hot and airlines were flying and industrials and energy were on the move, folks were citing all of that as a reason to be bullish. Now that all those groups are down, they not only don’t cite them, they tell us to ignore them.
Now there are a variety of reasons why tech is where it is at, why tech should continue to go up, why those other stocks don’t matter.
You cannot have it both ways. You cannot say good breadth is good (it is) but bad breadth should be ignored (it shouldn’t).
The market has two main choices in the weeks ahead. First, those down-and-out and left- for-dead stocks rally to play catch up. Or, second, tech comes down. There is a third option, too: We keep with the trend of haves and have nots.
If the first choice happens, then the market improves dramatically. If the second happens, the market moves to an oversold condition after a good whack and turns sentiment from the current complacent to bearish, providing a buying opportunity.
If the third option continues, well in my view that is a bearish option, because as we all know it can go on a long time, but when it stops, it stops in an ugly way. Just take a look at the Russell 2000 relative to Nasdaq dating back to the late ‘90s. We are not as stretched as we were then, but you can see that at no other time have we seen a divergence this large dating back two decades.
Finally, I will note that the DSI for Nasdaq got to 91 today, so we’re back to needing a down day (or more).
I want to point out that I have been waiting for Abbott (ABT) - Get Free Report to cross this line for weeks now and it did so Thursday. Sure it did so lethargically, but in a bad tape, it did it. I still like the chart.
The equity put/call ratio’s 30-day moving average is extreme.
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Lockheed Martin (LMT) - Get Free Report broke down Thursday. It ought to measure to $350 now. As long as it stays under $360 that’s what I would look for. If it can recapture $360 then this is a false breakdown.
Intel (INTC:Nasdaq) filled that gap and is now stuck in a trading range between $64 and $56. If you want to bank on INTC holding the downside then your stop is under $56.