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Too Bearish?

While we could slip further on the S&P 500, we might be getting a little too bearish. Here's why.

The Market

Note: There will be no 'Top Stocks' Monday evening. I will return on Tuesday.

The S&P 500 has now marked itself to the downside for four straight weeks. That’s something it hasn’t done since the spring of 2019. In fact, since the 2009 low it has had eight such instances and only once did we get a week five to the downside.

That doesn’t mean we can’t get another week to the downside, but the probabilities say we shouldn’t count on it. Now, let me give you some anecdotal evidence that also says folks got too bearish. I have now seen not one, not two, but three pundits loudly calling for a move to 2850 on the S&P, something we didn’t see in August.

You want the flip side of that?

My Saturday Twitter Poll shows a whopping 60% looking for the next 100 points in the S&P to be to the upside. To put this in perspective, that’s a 20 point margin to the upside, something we have not seen in the five or six months I have been doing these weekly polls. The largest spread to the upside up until now has been up 14.

In fact the only other times we have seen a spread that wide (around 20 points) has been to the downside, and both times the consensus was wrong as we rallied hard.

So let’s talk about the indicators.

We know the 30-day moving average of the advance/decline line is oversold. We know the Volume Indicator is at the upper end of oversold. The Hi-Lo Indicator (shown below) still hovers at 50% so it’s not oversold (under 20% is oversold).

We also know that the McClellan Summation Index is still heading down. It still requires a net differential of positive 2,000 advancers minus decliners on the New York Stock Exchange to halt the decline and obviously more to make it turn upward.

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We know the 10-day moving average of the put/call ratio got back to June levels, so the complacent sentiment had been wiped away in these last four weeks. With the rally the last two trading days of the week, I’m not sure we’ll see a dramatic decline in the Investors Intelligence bulls this week. Had we not had a rally these last two days I would have been certain we’d see a reading into the mid 40s.

Other issues of concern include the fact that iShares iBoxx High Yield Corporate Bond fund (HYG) - Get Free Report and SPDR Bloomberg Barclays High Yield Bond fund (JNK) - Get Free Report did not participate at all in the late-week rally and the fact that we are no longer short-term oversold as we were Thursday morning.

So where does that leave us? If I go back to the chart of the Sentiment Cycle, we’re probably at the blue arrow where we get some sort of up and down action at a midway point. Don’t try and match the two charts up exactly, it should be more of an understanding of where we are in the cycle.

I’ll say this, if the market has a pullback early in the week I would think it then rallies late in the week. It has that feel where it’s going to do its best to shake out longs and shorts.

Insert sentiment cycle and spy here.

Monday is Yom Kippur, the Jewish Day of Atonement, a holiday I observe. For those who observe, have an easy fast.

New Ideas

Universal Display (OLED:Nasdaq) came down to support in early September and has held it these last three weeks so as long as it stays over that support at $160 I think it gets the benefit of the doubt to cross that downtrend line and complete the correction.

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Today’s Indicator

The Hi-Lo Indicator chart is below:

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Q&A/Reader’s Feedback

Helene welcomes your questions about Top Stocks and her charting strategy and techniques. Please send an email directly to Helene with your questions. However, please remember that TheStreet.com Top Stocks is not intended to provide personalized investment advice. Email Helene here.

MercadoLibre (MELI:Nasdaq) met its downside objective from breaking that blue line when it tagged the $950 area a week or so ago. I think that $1,100-$1,150 area will be resistance on the way back up, but it should try to get there.

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We looked at the biotechnology exchange-traded fund XBI (XBI) - Get Free Report when it got down near $100, and I had noted that was enough. But I also thought it would then go into a trading range of $100-$110, and that was wrong, as it went to $116 before coming back down. Last week it tagged the broken downtrend line so as long as it holds that $105-ish area it should be OK. The blue line (around $116) still represents resistance, but the biotechs have been correcting for months and never got extreme the way so many other groups did.

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Inari Medical (NARI:Nasdaq) had better hold here at this uptrend line or it is going to be ugly. In fact if it doesn’t hold here I would expect it to come down to $55 where I would probably find it more attractive.

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I was asked to follow up on Intel (INTC:Nasdaq), a stock I warmed up to in early August after it had that big flush to the downside. I still think it is trying to bottom, but would like to see it hold over this $48 area.

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