Despite Today's Rally, the Theme of this Market is Group Rotation
Breadth improved, but is it enough to move the needle?
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The Oscillator moved! Unlike Monday, where the Oscillator moved up just because breadth wasn’t as bad as it was ten days prior, now it moved up because breadth was actually good. Mind you, it was not as good as it was on August 4th, but only fractionally.
On August 4th the upside volume tried all day to get itself up and over 80% but in the end, it couldn’t do it. It ended the day at 79% which is exactly the same as it ended the day on Tuesday. The only reason I point this out is because typically when small caps have such a big day, the volume can get itself up and over 80%.
That brings us to the chart of the IWM. I was asked if it is a head and shoulders bottom. Here is the chart on a weekly (three-year) chart because I think the pattern is easier to see on a weekly chart.
I won’t argue that it has the potential. And I suppose I could add that the 50-day moving average just crossed over the 200-day moving average, creating what folks like to call a Golden Cross. My experience is that often Death Crosses and Golden Crosses tend to come late, and in the short term, we tend to go the other way.
For now I would say that the Overbought/Oversold Oscillator runs out of big red numbers to drop this coming Friday. After that, the red numbers get quite a bit smaller, so it’s harder to make the case for the ‘others’ being oversold.
The real question is if all those folks who just turned cautious in the last week stay that way or if they flip right back to bullish. I did not get the sense that they were jumping back in with both feet. Not yet, but it’s early.
Then there is the Daily Sentiment Indicator. Nasdaq is only at 78, so it’s still not extreme. But the VIX is at 17. That means that runway is short. If the rally continues, that will probably be under 15 in a hurry, and we know that once that goes under 15, the upside ride is not so smooth.
I suspect they just run through the oversold groups, and then we’re right back where we were. They already rallied the Transports. They rallied biotech but not the drugs (yet). They will probably have a round of short covering in the software names before this is done. After all, that has been one of the themes of this market: group rotation.
