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The Nasdaq Will Get Oversold Again

That is how weak so many individual stocks have been in the last six weeks.

We might be at the highs for the major big-cap indexes, but, as I have been harping about for the past month, that is not the case with so many individual stocks. For example, just look at a chart of the percentage of stocks currently trading over their 50-day moving average lines.

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The 50-day moving average is the average price the stock has traded at over that period of time; 50 trading days ago was early September, which was about a week or so after the rally began. Shouldn't there be well more than 50% of the stocks on the NYSE trading over their average price of the last two and a half months? Yet, that is not the case. That is how weak so many individual stocks have been in the last six weeks.

Because of that, sometime this week Nasdaq is going to get oversold again. In the recent market, that has meant we're talking about the Russell 2000.

I am not talking about the Overbought/Oversold Oscillator, but rather the 30-day moving average of the Nasdaq's advance/decline line, which is more intermediate term than the shorter-term Overbought/Oversold Oscillator.

Keep in mind that the Russell 2000 peaked six weeks ago and has been leaking to the downside since then. This is how it gets oversold. In the past year, we have seen three such oversold readings. I have circled them in red on the chart. Obviously, last November's and August this year were quite good oversold readings. Early April was rather mediocre.

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In November and August, sentiment got very sour on an intermediate term basis. The Investors Intelligence Bulls dropped off. In late August thru mid-September, the bulls were under 50% for four straight weeks. Now they stand at 64%.

Right before the election, we saw 41% bulls. April saw one week dip under 50%, to 49.5%. So, on an intermediate term basis, unless intermediate term sentiment falls off a cliff in the next week, I would not expect this oversold reading to be as good as November or August.

But we did see the put/call ratio zoom up to 118% on Friday. That's a start. We also saw the put/call ratio for ETFs over 200% for both Thursday and Friday. We don't often get back-to-back readings so high. Since 2013, there have been 12 such instances and only once was the S&P 500 not higher two weeks later.

There were a few times when it took some more downside work over the course of the next week before the rally began again. And some of the times, the rally lasted only about a week or so before more downside arrived. But the point is the shorter-term sentiment is starting to shift.

If you look at a chart of the S&P 500, you can see it has held that uptrend line like a champ. Ask yourself this: if that line breaks, do you think sentiment would turn sour in a hurry? My guess is yes.

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Then there is the chart of the VIX. Doesn't it look as though it wants to break out over those recent spike highs? If it does so, we know moves like that in the VIX tend to be short-lived and take place over the course of a few days. If that did happen, the VIX would look jumpy, which generally happens just before a rally.

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The main issue remains breadth. Even though the Russell 2000 was flat on the day on Friday, breadth remained negative. That needs to change.

Perhaps something happens in the next several days to let us see some sort of change in intermediate- term sentiment. If we don't see a change in intermediate-term sentiment, then whatever rally we get would likely be more like April and less like November and August. In other words, maybe we need to go down to go up.

New Ideas

Bonds are back to the forefront again. Friday iShares 20+ Year Treasury Bond ETF (TLT: Nasdaq) collapsed. I'm still looking at that $122-$123 area as support, so if it breaks maybe that's what scares stocks.

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I believe it was late last year when I first recommended Abbott Labs (ABT) - Get Free Report. It has been a terrific stock. But the measured target was $54, which is where it has been for the last six weeks. I'm in favor of taking profits here. And if it breaks this uptrend line that has been in place for nearly a year, it would begin the process of building a top.

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Today's Indicator

The number of stocks making new lows did not increase on Friday.

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Q&A/Reader's Feedback

International Business Machines (IBM) - Get Free Report had a terrific gap up for its earnings and has essentially given it all back. I would expect a bounce if/when it fills the gap down near $147-ish. It would be more bullish if it doesn't fill the gap, because then it would leave those months from July to October as an island. Quite frankly, it looks like the shorts covered and no one really wanted to buy it.

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It's hard for me to get excited over the chart of Discovery Communications (DISCA:Nasdaq). It had a measured target at $20-ish and it blew right through it, like a hot knife through butter. If it rallied to $19-$20 and then came back down to form a base of some sort, I might find it more interesting, but I need to see it lift and retest first.

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Gilead Sciences (GILD:Nasdaq) is bouncing off support (just like the IBB chart we looked at a few days ago). I suspect it rallies and then dips again to form a W as it did in August, but if it can hold on to the $72 area it's worth a look.

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