It seems there is plenty of panic going around. Not just markets, but empty food shelves and canceling of events all over the place. It is wise for folks to be safe when it comes to health.
As for the market, you already know that we have one metric that is short-term oversold. That’s the McClellan Summation Index “what if” metric. We have another that will get short-term oversold on Tuesday. But can I make the case for my own Overbought/Oversold Oscillator to be oversold?
Let’s start with the Nasdaq Momentum Indicator. It still gets oversold on Tuesday, no matter what I plug in for Nasdaq; this indicator rises after Tuesday’s close. That’s the oversold condition.
My own Oscillator is a different story. I can make the case it is oversold now, just based on how low the Oscillator is. But it is based on the 10-day moving average of the net of the advance/decline line, so for an excellent oversold condition, we want to look back and see a very long string of negative numbers to be dropped. For the next four trading days, there is only one negative number to be dropped. But for two of those days the positive readings are both rather small. No matter how we look at it, however, by Friday of this week this indicator will be grossly oversold.
Here are the numbers behind the chart so you can see what we’re dropping as we move into March.
We had three days where there was more than 90% of the volume on the downside last week. Back-to-back readings of 90% are not common, so as you can imagine three in one week is quite rare. That tells me there has been a lot of selling.
Another sign that there has been a lot of selling is the soaring number of stocks making new lows. The New York Stock Exchange had 938 new lows on Friday. As you can see that’s a bunch. There were just over 1,200 new lows at that December 2018 low.
Before I get to the intermediate-term, let’s note that there was a lot of selling last week. Was there panic selling? Some. I think Thursday and Friday saw some panic selling. What bothers me is that the TRIN (Trading Index) – which is a measurement of the advance/decline line and up/down volume – never got to 2.0. To the best of my knowledge we have never seen a decline such as we had without a reading at least over 2.0. I have considered this quite a bit and I don’t have an answer, nor do I care to rationalize it. The bottom line is we haven’t had one and it is something that goes on the negative side of the ledger.
Anecdotally, my mother spent the weekend with me and never once seemed concerned about the market. It was weird because she has notably tended to be quite concerned at other fast declines in the market, notably the August 2015 decline. Here, too, I can rationalize all I want but I do not want to. I will take that as a sign the public is not yet in a panic over the markets.
On the intermediate-term front, the 30-day moving average of the advance/decline line, which you might recall got overbought around the third week of January, is still not oversold. I can make the case that it ought to have a relief rally, but not the case that it is solidly oversold. The math says that is still about a month away.
The Volume Indicator is at 44%. You can see it bottomed right around here in late May and August 2019, but in December 2018 it got down to 41%. I would say this is getting closer to an oversold condition but is not there yet.
The Hi-Lo Indicator is at 32%. Readings under 15% indicate an intermediate-term oversold. So, this is another intermediate-term indicator that has moved quite a lot but is simply not there yet.
Sentiment-wise, the 10-day moving average of the put/call ratio has finally, thanks to some high readings last week, spurted higher. Yet it is not even where it was in May, August or October (and it was significantly higher in December 2018). Remember sentiment indicators take time to shift.
Similar to the way the TRIN bothers me, the fact that the put/call ratio for exchange- traded funds has not gone over 200% once in this downdraft is disconcerting. We had a slew of readings over 200% in October. Heck, mid-December had a reading at almost 300%. And the reading at the December 2018 low was 326%. So why hasn’t this given us even one reading over 200%? I can rationalize by saying that folks are more concerned with selling stocks than they are with protecting their portfolios, but that would be rationalizing, something I prefer not to do.
The American Association of Individual Investors saw a huge shift in sentiment, but did it show extreme bearishness? I do not think it has yet. With bulls at 30.4% and bears at 39.1%, we at least have more bears than bulls, but August of last year saw bears at 43%, and bulls were down near 20% in October.
The Investor’s Intelligence readings tend to move much more slowly, but I do expect they will show a massive shift to bearishness when they are released midweek this week since bulls were still at 49% last week. I will be shocked if the bulls are not in the low 40s this week.
Finally, there is the Citi Panic/Euphoria Model. I do think it is about a week old (in terms of data input) when I see it in Barron’s each week. But it is shocking to me how high above Euphoria it still is. There is no way, even if the data is a week or two old, that it is anywhere near Panic now.
Let me show you this indicator from September 2018 to October 2019. It tagged Euphoria in September and was already heading down when the market peaked in early October, which is not the case now. It took two months to get to Panic, and it did so in early December while the market bottomed in late December. I show this to you, so you can see it is not fast moving at all. It takes time to make its journey from one extreme to the next, thus my note that even if we had an up to date version it is very doubtful it is even close to panic.
Friday’s decline and late day rally left a lot of stocks with spike lows. Should we whoosh back down on Monday, and if many of those stocks are unable to break those lows that would be a good first sign that the upcoming short term oversold condition really should lead to a rally by midweek. We would see that with fewer new lows The issue continues to be the intermediate-term indicators are not oversold yet and now there are likely sellers overhead.
I suspect many will have this line on the PowerShares QQQ Trust (QQQ:Nasdaq) -- note that soaring volume -- and therefore will feel better should the QQQs not break it.