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Why Are You So Defensive?

Drugs, foods, soaps, smokes and the like are working in big-cap stocks right now. Let's see what's going on.

The Market

Here’s the interesting part of the market today. It was another either/or market, but we are seeing an awful lot of green in defensive names, not in tech. Sure, I know, Microsoft (MSFT:Nasdaq) was up a gazillion, as was Netflix (NFLX:Nasdaq), but elsewhere tech was quite mixed.

Yet the drugs, foods, soaps and smokes are working in big-cap stocks. None of them are trillion-dollar companies, but they pay dividends and they are perceived as safety stocks. I am not quite sure the media has caught onto this yet. Go and read the new high list; there are more health care names on that list than there are technology names.

But the small caps, now at six straight red and having closed under the 200-day moving average, continue to be downright awful. And that means breadth is awful, too. But let’s check in on a possible oversold condition there.

First, the "what if" for the McClellan Summation Index now needs a net differential of positive 3,700 advancers minus decliners to halt the decline. At positive 4,000, it has gone to an extreme oversold. So that could come at the close tomorrow — that is if breadth is weak again on Friday.

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My own Oscillator will be oversold midweek next week. When I perform a "what if" on the Russell Momentum Indicator, I get Wednesday as the day it stops going down. What I do here is plug in lower closes for the index, until we get to the point that the Momentum Indicator stops going down and heads up. The exact day isn’t what matters, it’s the general timing that matters and here again that is midweek next week.

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The put/call ratio finally moved up to 1.04, which is the first-triple digit reading since July 27. The 10-day moving average of the put/call ratio is inching up. The chart is shown below.

The American Association of Individual Investor bulls backed off to 31%. The bears are 35% so this survey is getting closer to what I’d call enough panic. I’d like to see more.

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The National Association of Active Investment Managers Exposure Index fell to 70, which is also encouraging. It was 97 a week ago, and this 70 area has been the low since that 44 reading in May. Here, too, I would love to see it lower, just because I feel there is a lot more damage that has been done now vs. the other two swings down.

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Today resolved very little. All it did was take the small caps closer to an oversold condition and gave us a bit more fear. New Ideas

Today everyone seemed to notice the commodity stocks stink. There is a big potential head- and-shoulders top in Freeport-McMoRan (FCX) - Get Free Report. When we last checked in on it, I was a seller as it filled that gap at $39, but now what? The DSI for copper is now $8, so I have to figure it is very close to a bounce. If that bounce materializes and then cannot get over $34, I’d get concerned. But for now with a DSI like that I am looking for a bounce in the next few days.

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Today’s Indicator

The put/call ratio is discussed above.

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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.

Big Commerce (BIGC:Nasdaq) is the type of chart I would typically love, because it’s down and out and hasn’t’ broken its prior low, but in this market that has been a recipe for loses. If it is going to be a good chart, then it will have to first recapture $60 and eat its way up through the resistance at $70. So, yes, it ought to bounce but a failure to get over $60 is a warning sign.

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The top in Pinterest (PINS) - Get Free Report measures to $25 ultimately. On trading basis, though, there is a little gap to fill around $50 that should produce a bounce. If it can’t then $45-$46 for sure should. For a trade I’d probably buy a gap fill, especially if the market is oversold fully by then.

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I am inclined to think CVS (CVS) - Get Free Report is just enjoying a sideways correction off that May high, so unless it cracks under $80, that’s what this looks like. The stock tagged $90 in May, so if this turns into a correction then it should ultimately make it to $100. That’s why I’m willing to give it some leeway.

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Church & Dwight (CHD) - Get Free Report has my interest, because it is a defensive stock and those have done well lately. Right here it’s in the middle of nowhere, but a move up and over around $88 would be bullish while a move under $82 makes it a problem. If the dividend was over 3% like so many other staples stocks it would make it even better but it isn’t. I’d say it goes on a watch list for sure.

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DuPont (DD) - Get Free Report is a little oversold down here but it eventually measures to the mid-$60s. I’m inclined to sell rallies or wait to buy in the mid-$60s.

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